Strategy New Zealand

I am now of the view that New Zealand only has two viable strategies for improving the lot of New Zealanders in per capita terms. In fact, I suspect that there is only one viable strategy, which is fundementally the same strategy hinted at in one of my first posts
http://www.headitorial.co.nz/2009/09/what-can-we-do.html

The two strategies are:

1. Restrict population growth and live within our existing means.
2. Transform the high end of the economy, with likely significant impacts (ie change) on the rest.

Strategy 1 is achievable. I suspect strategy 2 isn't. I haven't expanded either strategy yet, or even properly explored strategy 2, therefore it is worth considering what might need to be done in either case. This will, likely, occur over a few posts but for now it is worth giving a high level idea of what each strategy is.

Strategy 1 is the "I've actually got plenty of economic wealth if I just don't keep spreading it across a bigger base" strategy. This strategy is achievable because New Zealand's population growth doesn't seem to be manifestly lifting productivity, it seems to mainly be growing consumption and debt. Traditionalists will claim that you need to grow the population to grow your economy but this doesn't wash. If your economic growth is mainly consumption and not production then you must, necessarily, increase debt. Overall, or more particularly over time, this is not a winning strategy. There are significant economic costs created by this approach too. If you want unattainable house prices for young people then the "bring in lots of people with money from overseas and restrict access to land" tactic is perfect. And, as the population growth isn't translating to productivity then property investment rules. After all supply is restricted and demand keeps increasing.

For the avoidance of doubt I am not suggesting that New Zealand's immigrants have been low rent. It is possible that overall skills might go down by restricting immigration. The point is though, whatever the skill base of recent immigrants, productivity is not increasing and consumption is. Without immigration New Zealand's population would drop. Therefore, for our population to be actually growing (and quite quickly) we must be importing quite a few more people than we need. Obviously then, accepting less immigrants will allow for zero population growth.

Strategy 1 won't get us to the top of the OECD in per capita terms, it's too late for that now. But, the reduction in consumption and the reduction of price bubbles (most obviously property) will reduce the balance of payments and make more money sustainably available within New Zealand. Property won't be the 'golden goose' and so other (productivity) investments will be more attractive. We may even find, as New Zealand has quite sustainable natural wealth, that reducing population does get us to the top of the OECD over time.

By comparison Strategy 2 is much harder and much riskier. It is the strategy that most people suggest is the right one for New Zealand without anyone ever doing what is necessary to achieve it. Often it is claimed that money is the only barrier to success but this isn't true. New Zealand isn't designed culturally or socially to be a high technology economy. We are, frankly, too socialist and 'tall poppy lopping'. Now, this doesn't mean that things have to be massively unequal. Most people tend to think that meritocracies have to be like the US model, but the US model is actually the exception. Most large high-technology economies are quite equal, in fact they tend to be more equal than poorer economies. You don't have to have the inequality of the United States to be able to establish effective meritocracies, because it isn't just about salary. It's about lifestyle and its about culture.

New Zealand often falls into a conceit of claiming superlative lifestyle. New Zealand has good lifestyle for most people but it is not superlative. We have an elite lifestyle that suits some people; people who love the outdoors, outdoor sports and outdoor living. This appeals to some extent to most people but it isn't enough. The bleeding and leading edge of productivity (the part of the curve you have to be on to become genuinely rich) is created when you have great diversity (and critical mass) of creative and technological talent. This kind of talent wants it all - reputation, purchasing power, lifestyle, technological infrastructure, cultural pursuits, pomp, ceremony and pride.

Well New Zealand's reputation is sort of hobbit-like, our purchasing power has been eroding for a while now, lifestyle is good but limited, infrastructure is consistent with a country that is getting steadily poorer against world standards, culture is good in parts but some parts (such as Auckland architecture) are not great. And, when it comes to pomp, ceremony and pride we are poor (try being in Sydney or Melbourne on Australia day sometime - it's quite illuminating).

Strategy 2 is an organisational transformation on a state wide scale. You couldn't ask for a bigger challenge; and most people, I think, don't want to change.

Thinking Back to Think Big

There is often concern, for good reason, when governments get involved with the business of business. Most people agree that governments aren't usually very good at 'picking winners and losers'. Nevertheless sometimes Keynesian economics (stimulating an economy through government spending) does work. Sometimes, however, it does not work.

It is worth considering, though (and with the benefit of hindsight), why a decision to fly to the moon creates a great deal of technological innovation, with associated economic benefits, and why other schemes, such as New Zealand's 'Think Big', don't.

It would seem the answer is relatively obvious. An activity like flying to the moon was only possible because new technology had to be developed. Existing technology just couldn't do it. Despite huge costs borne by the taxpayer technology was developed that only American manufacturers had. This translates into industry leading and that is valuable.

Think Big, however, made a relatively typical mistake. This 'strategy' was to pick up on well established technology that isn't particularly prevelant and build capacity. This seems smart enough but the problem is, unless you have picked up on a technology where you have some form of natural or other strategic advantage then you are probably doing exactly the same thing as any number of other countries and developers. As a result you may have some significant capacity in valuable production but worldwide demand gets swamped by a now very large worldwide supply. If you are lucky you may have a majority of new products that may at least have a small margin but some production will go the way of many new tech bubbles and fall over. The total new economic activity will be very small and may even be negative of the costs of implementation.

There really is no such thing as a conservative transformational strategy. You either 'stick to your knitting' or you be bold. If you 'stick to the knitting' then you may have to accept very limited economic growth, which isn't necessarily a problem if you are careful not to increase your consumption costs. If you want to consume more then you need to grow, if this means transforming your economy then this means being bold. This is risky and it isn't necessarily pleasant but it is the only way that a transformational strategy will be worth pursuing (except for the other 'strategic' approach - blind luck).

A conservative transformational strategy will, almost certainly, be relatively low risk. It will also be very low return, in fact it may never pay back. Unless you're using an aspirational goal to drive world leading technology development then anything you pick that is leading now will be following tomorrow. Think Big was Think Back.

Financial Services - not the way to wealth

Interestingly, but coincidentally, I had previously talked about the paths that some rich nations (measured by GDP per capita) had taken. One of them was the financial services approach. My observation was that this seems to work only in relatively small countries (smaller than New Zealand) and that it generally means making the kind of compromises that I don't believe New Zealand would make.

Now, John Key has made the switch from national cycleways to financial services with the same level of consideration as the cycleway choice - ie not much. Financial services do not appear as primary industry for any country of any size that is rich, including Ireland (which is supposedly the model for Key's ideas). Being wealthy is about adding value not hanging on coat tails and that is what financial services is.

Very small countries can do very well by hanging on coat tails but there is one of two prerequisites for this. You either, first, have to be a country hanging on the coat tails of much larger neighbours (and I mean much larger - such as Liechtenstein to Switzerland and Austria and the rest of Europe); or second, you have to be willing to, perhaps not quite turn a blind eye, but certainly be very poor of sight.

You either represent a neutral and acceptable option to powerful neighbours (by virtue of not being a threat, somewhat dependent on the neighbours and culturally similar); or you don't ask questions about where all that money came from and you certainly tell no tales (ie you struggle to recollect any details of that particular transaction). Let's be clear, despite a national small man syndrome New Zealand does not fit the first category and I don't for a minute believe that we want to be in the second.

Hear is the fundamental problem with expecting financial services to lead to financial wealth. Capital is an enabler. Capital enables someone else to substitute for resources or labour or both. If you are specialising in financial services then the truism is that you are enabling someone who isn't you. Unless a country's wealth needs are at the margin of large neighbours wealth generation then enabling someone else will not generate sufficient wealth for a country to be wealthy. Despite the self-promoted importance of the financial community all money is dumb money. Money is basically a wildcard for resources or low skilled labour. If you don't have low skilled labour or resources then money can substitute, but it is no more wealth generating than iron ore.

Wealth comes only from high skilled labour. The kind of skill that can't be substituted for by capital no matter how much you can throw around. The kind of labour that doesn't make things but designs the things that others then make. The high skill atracts plenty of money which then pays for plenty of relatively cheap resource and cheap labour. Rich countries make some things, they can afford to pay their lower skilled populace lots of money (after all why not keep it in the country when you can) but what they do - fundamentally - is design the electronics, the ultra-lightweight ultra-strong materials, the robots that make robots, the processors that make processors, etc.

Assuming that New Zealanders are willing to hang up their morals then financial services might produce enough wealth to fund a population of, say, the Cayman Islands (about 49,000). That's enough to cater for two years of New Zealand's population growth - max! We could achieve the same economic outcome, in per capita terms, by restricting immigration for two years.

Time changes everything

Many people are highly cynical of the importance of history to the present and the future. "Why look back?" might be the catchphrase. Looking at history, though, does tell you many things. Perhaps the most important is that the world stays, more or less, the same but the fate of nations and people is volatile; and, inevitably, everything changes.

Understanding the process of change is one of the many complexities that nations and people must come to terms with to maintain their wealth and lifestyles (to the extent that they can).

The wealth of nations has been in constant evolution since nations (originally city states) began. The first wealth revolution was around agriculture and it was the reliable production of surplus food that enabled the division of labour that we now take for granted. Wealth in these early days was primarily driven by those who tamed the crops (and the rivers - for irrigation).

Soon enough the division of labour established the value of 'value-adding', which is to say the value of a developed or made product rather than a undeveloped natural resource. Nevertheless, wealth still belonged to those that had grain. The funny thing about technology is that, despite valiant attempts to keep it secret, the use of it inevitably leads to the wider access of that technology, and also to the development of the technology's inevitable replacement. It spreads and it spreads quite naturally.

At various times the spread of technology also creates havoc with economies. One effect is that the wealthiest societies can lose their relative advantage (which often comes with a wealth premium) and find themselves falling behind. Another, less frequent but very dramatic, effect is a technological revolution. In fact there is never really a technological revolution per se. The technological development is usually an incremental evolutionary development where previous ideas are merely added to or brought together in a different way. Every now and then, though, one of these evolutionary increments changes a societies economy manifestly. The technological revolution is an economic revolution caused by the evolution of technology.

There are many examples of this. The medieval industrial revolution, the post-enlightenment industrial revolution, the information age, etc. A more simple, and yet no less dramatic, revolution brought great wealth to renaissance Holland (and from there to England). Again it was simply some different ideas brought together (many from the far East) in an innovative way. And yet the improved automation and efficiency in the textile industry created huge wealth for the Northern Europen economies that had previously only produced raw wool.

The best thing about this example, however, is to demonstrate how quickly we move on. Textiles made enormous wealth for the Dutch low countries and England (which they cannily leveraged as new technology presented opportunity). Today, though, the production of textiles and apparel is ho-hum. The production of material and clothing is now done by rich country and poor. The production of textiles is no more an indicator of the likely wealth of a country than is being a country.

As wealth has moved on technological development has moved with it (increasing as well with both population growth and literacy). Now more than ever wealth doesn't so much come from digging stuff out of the ground or growing things but by making things that are ever more complex to build but simple to operate. The key indicator of wealth now is the sheer amount of 'value add' that is built into everything that a country makes.

It isn't as simple as deciding one is going to build clever things, though. While it isn't necessary for a country to be poor because of a lack of resources it seems that the best producers do have history with their production. It seems general common sense that societies that have 'grown' up with high-technology industries know those industries better than anyone else. Those that try to follow them tend to become more of a value added labour resource rather than really participating in the wealth.

The problem is that, eventually, all industries become common and commodotised. Unless a country is on the ground floor of new industries (useful and desirable industries of course) then it is destined to become increasingly irrelevant.

New Zealand has a long history with food technology (especially dairy) and that expertise propelled New Zealand to near the top of the per capita wealth rankings. But, many countries do food processing now. New Zealand is still among the very best, there is no doubt. Unfortunately, that may become the commercial equivalent of the Queen of the Pigs.