Thursday, March 25, 2010

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

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.

Wednesday, March 10, 2010

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.