Posts
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.
Wednesday, February 24, 2010
Wednesday, January 20, 2010
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.
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.
Wednesday, December 30, 2009
What do wealthy nations make?
In thinking about whether New Zealand can be richer, and what it might have to do to do that, it is worth looking at the fundamentals. What makes a nation rich and what makes it poor?
Looking at industrial production helps understand this a bit better. This comparison and analysis isn't easy. Once again the data is fragmented and difficult to compare. Even using the CIA World Factbook isn't particularly easy in this case. I haven't finished looking at poorer nations yet but some interesting suggestions come out of looking at the rich nations. Once again my rich assessment is based on GDP per capita. The wealth of individuals is more important, ultimately, than the absolute wealth of a large group of people.
So, what are the apparent conclusions from looking at industrial production? Most are intuitively obvious:
Looking at industrial production helps understand this a bit better. This comparison and analysis isn't easy. Once again the data is fragmented and difficult to compare. Even using the CIA World Factbook isn't particularly easy in this case. I haven't finished looking at poorer nations yet but some interesting suggestions come out of looking at the rich nations. Once again my rich assessment is based on GDP per capita. The wealth of individuals is more important, ultimately, than the absolute wealth of a large group of people.
So, what are the apparent conclusions from looking at industrial production? Most are intuitively obvious:
- rich nations have high value add (they make products not raw materials)
- tourism, textiles and chemicals are ubiquitous products among the rich nations
- electronics and food processing also feature often
- the availability of raw materials doesn't necessarily constrain value added production but it does make it more likely
- above a certain level extra population doesn't equate to higher individual wealth
- wealth has never been weightless
- the highly valuable products change over time
- New Zealand features well up the GDP per capita rankings but doesn't have enough high value activity to get to the top
The best indicators for wealth seem to be around the production of chemicals, electronics and processed food. Tourism and textiles feature large in high value economies but, at first blush, also seem to in relatively poor countries (except for the very poorest). Tourism occurs where there is some attraction and is highly valuable where it occurs. Textile technology seems to be very widespread and available. Processed food is obviously unlikely in places where they struggle just for staples and, like electronics and chemicals, is high technology.
Some economies, Japan is a good example, import large amounts of raw materials and add a great deal of value to the products they manufacture. However, there seem to be advantages to having the raw materials in the first place. For example, the greatest incidence of petrochemical industry occurs where nations have oil resources. This makes sense. There must be a cost advantage to manufacturing products from local resources. And, it makes sense that expertise will grow when there is a long history with a resource. For example, New Zealand's high technology dairy processing makes sense due to its long history in dairying. Some countries, such as Kuwait, seem to have used their natural resources to ensure that value adding industries were established (petroleum and petrochemicals) rather than just export raw resource.
In a first attempt to think about the role of resources I had a quick look at population densities compared to wealth per capita. The result showed that at low population densities countries were uniformly poor but at higher population densities there was no discernible pattern. Having a minimum amount of available labour is absolutely necessary to gain wealth but that amount doesn't seem to be very high. From that point on the role of population seems to have little to do with the wealth of a nation. High technology development obviously helps support larger populations but the high tech seems to be the prerequisite and not the population.
The most highly advanced economies are not the richest (in per capita terms). The US, Germany and Japan feature highly but each seem to be supporting higher populations than would seem optimal (from a purely wealth per capita perspective). Economies based on little production, and indeed mainly on services, can be quite rich if they are small. For example, Bermuda has among the richest of individuals with only tourism, international business and light manufacturing; and Guernsey ranks quite high on only tourism and banking. Generally, though, services do not support larger numbers. The very richest countries (the top three examples of which are Liechtenstein, Qatar and Luxembourg) are both high tech and small.
Wealth has never been weightless. Weightless in this context means using a relatively low environmental footprint (including, or perhaps, especially energy). Some countries (ie very small ones) can make a respectable living out of services. However, even these countries tend to embrace tourism, which isn't as energy or resource intensive as some but is still far from weightless. Most rich countries are energy intensive. Surprisingly this doesn't necessarily mean heavy industry, big steel things are a source of value but don't seem to be the highest. Highly energy intensive industries like food processing, chemicals and electronics are at the forefront of wealth. The concept of a high value weightless economy based on services seems attractive but history doesn't yet smile favourably on this. Software giants who have established dominant positions seem attractive but ultimately there is more money invested in the 'weightless' internet in PCs, servers, modems and routers.
Notwithstanding the above the high value products change. Textiles once made the fortunes of the Low Countries, English and French but now seems to be spread across the world. Steel and machinery are still highly valuable products but don't seem to be a key indicator of the highest wealth. Electronics and chemicals seem to be the golden products today but will they be tomorrow? Services don't seem to feature that highly yet but is their time still to come, or is the 'killer app' of tomorrow still a fledgling technology today? Many people are promoting the 'green' economy, mainly around energy; but energy has been a major industry for some time yet rarely features as a valuable product. Energy seems to be mainly an enabler. There isn't an inherent demand for energy, only for what it can do.
New Zealand features relatively high on the individual wealth stakes because we have some of the top value earners. Tourism and textiles are nothing special (in the context of being common throughout the world) but they seem to be perennially valuable. New Zealand even does some machinery manufacturing, which although relatively small is also valuable. Food will always be valuable, though, and New Zealand is at the forefront in food technology. Mainly in dairy but also in other high value add products, such as wine. In general New Zealand has a small mixture of relatively high technology industry but mainly 'old school' stuff. We're not at the forefront of high technology and we probably don't have the energy intensity to do it anyway. Nevertheless, we're going backwards in relative terms and it seems to be a population problem. Growing GDP through increased consumption and property values (through arbitrarily high demand) is a poor way to grow GDP.
In terms of increased value add options seem somewhat limited. Food processing is worth sticking with and probably always will be. As will tourism and some limited textile production and manufacturing. Maybe we will find ourselves at the forefront of a 'weightless' economy but history suggests otherwise (and in any event there isn't a relative advantage in a weightless economy almost by definition). As for a 'green' economy well this is ultimately an energy play and energy is an enabler not an objective in its own right. Either we have to dial back the clock a little bit (on both population and expectation) or get busy with real high tech, energy intensive manufacturing (with no guarantee of a payback).
Sunday, November 29, 2009
What comes after Google?
One of the reasons that I started looking at the New Zealand economy was due to an inspirational presentation by Dr Paul Callaghan. Dr Callaghan wants New Zealand to return to the top of the OECD wealth rankings through embracing high technology entrepreneurism. "Let's do the business case" he said; and knowing a bit about business cases, strategy and such things I thought I would have a go.
Unfortunately I haven't helped Dr Callaghan much. So far I haven't been able to establish a strategic advantage that stands out that New Zealand could leverage internationally. Those countries that established high technology economies did so because the timing was right and they took their opportunities. Most did it because they had a history of it, some were already wealthy and sought to diversify at the right time and some were opportunists. New Zealand is probably 30 years (maybe even 40 years) late in its attempt to go high technology (except in agriculture which we already do). Still, as I feel I have let Dr Calaghan down I have asked myself the question "Why wouldn't the next Google grow in New Zealand?"
Everyone wants a Google. Google is high technology, it is very 'weightless' and it is enormously successful. In theory a Google could happen anywhere but Googles don't happen everywhere they (if we include Microsoft, Apple and the plethora of Electronic Arts, Facebooks, MySpaces, etc) they happen in one place - the west coast of the United States (technically Facebook started on the east coast but is now based on the west coast).
So how did Google start? It all started as a research project at Stanford University for Larry Page, who was joined by Sergey Brin. They explored a different method for prioritising web searches, successfully. Then they put the software into online production, founded the website and the company, raised $1.1million dollars, identified the profit making business model and exploded into massive success. Pretty easy really - although obviously it isn't.
Professor Jim Collins of Harvard published his key principles of building a great business and Page and Brin followed it exceptionally well. They were really good at what they were doing. They were passionate about it and started the business and raised the capital and then they worked out how to make money from it. Google also ticks the strategic marketing boxes - create a demand no-one knew they wanted, mass-customise it for both demand and supply, suppliers flock to you, clip the ticket. Think how successful this is by also considering Sony's Playstation and Apple's Ipod (or Iphone). Create something people want, make it accessible to both customers and alternative suppliers with as much flexibility and capability as you can. Clip the ticket. Page and Brin went one better. They tapped into the enormous content of the internet and made it freely available. Free supply and free demand means huge use. Work out that the same technology that makes the search engine so successful will also be perfect for automatically matching advertisers to people searching for their stuff and there you have a new economic empire.
But how did two students manage to suddenly become software corporate superstars (in a story not too different from Microsoft by the way)? Well, let's not underestimate Stanford whose alumni are also responsible for Nike, Hewlett-Packard, Electronic Arts, Sun Microsystems, Nvidia, Yahoo!, Cisco Systems and Silicon Graphics. Is it an accident that Silicon Valley grew up around Stanford?
How about the environment? I can't remember the article but I remember reading about the environment of places like Seattle and Palo Alto. The young people are published and known to the industry and the cafes, shops and general environs are full of the top guns. These are safe and pleasant environments where everyone mixes. People meet, deals are done and ideas flourish. In what environment in New Zealand would two students meet the founder of Sun Microsystems (or equivalent) who would then decide that he liked their ideas and hand over a check for US$100,000?
Interestingly it wasn't Google who worked out (technically) how to make money from advertising, it was a crowd called Overture (originally Goto.com) who were bought by Yahoo! A legal battle ensued between the two competitors and resulted in a deal that I just don't think could ever be done in New Zealand. Google got the final piece in their business model puzzle and Yahoo! got a share of the Google action. I feel confident that such a battle in New Zealand would have gone on (bitterly) for ever in the courts to the detriment of both parties. Some might argue that Google got the better of the deal but Yahoo! got a share of that success and went on to find their own niche.
Then Google went on to the second stage of its success story. Stay true to the business model (free service to internet demand and clip the ticket on advertising and supply) but be prepared to buy the new ideas (such as Google Earth).
So why wouldn't it happen in New Zealand? What would we need? A couple of brilliant PhD students with a good idea, a world leading University, an almost cultural attitude to entrepreneurism (a desire to be good at something, to be passionate about it and how to make money), an environment of good ideas, collaboration and some spare money, an attitude of getting the deal done and getting on with it and lots more available good ideas.
And what does New Zealand have? Apparently we have the students. New Zealand ranks well in the world for education quality (although we also manage to have quite high levels of illiteracy - ie we're good and bad). Supposedly we have the good ideas but we are under represented in patents, which suggests that we either don't have the good ideas or we don't follow through.
We don't have the world leading universities. We have universities that are dedicated to fractious infighting under a funding system that makes them scrap for morsels. We have universities expending enormous effort in explaining why they should get public money rather than demonstrating that they should get public money. We have universities almost completely divorced from business (although this is as much business fault as the universities); and when they do collaborate it is again to fight for the public purse. We have universities rooted, for all practical purposes, in medieval fuedalism. Only the heriditary lordships are gone, instead the lordly posts are given out on time served without being difficult.
Dr Callaghan suggests that a major problem with entrepreneurism in New Zealand is cultural; and I agree. New Zealanders like to be good at things (to an extent) but one should never ever be proud and passion is for those foreign types. Part of New Zealand is almost calivinist in its attitude. Only those who suffer in their work are morally worthy. No wonder the young people of New Zealand want to go overseas to experience life while they are young. New Zealand may be a great place to live but it is a crap place to work. Academically gifted New Zealanders who manage to escape the medieval fiefdoms become destined to either give in to the technocratic bureaucracies of political Wellington or the technochratic bureaucracies of corporate Auckland; or go overseas. In the absence of a passion of purpose then the need to make money becomes devoted to the passion of consumption.
In terms of the rest of the environmental piece, the good ideas, the collaboration, the spare money and the positivist attitudes; well I think that this comes only when a country is rich. History suggests this strongly. The Renaissance was triggered by wealthy patrons who had the leisure time to take an interest themselves. The scientific discoveries of the Reformation and the Enlightenment were triggered by wealthy patrons (who often had the leisure to do the science themselves). The great thinkers of the enlightenment were either proteges of wealthy patrons or wealthy landowners themselves. The industrial revolution was triggered again by wealthy patrons (who again often did the science themselves). The great American universities, schools and museums were nearly all created by philanthropy during the United States great wealth boom.
Entrepreneurism isn't, I think, the trigger of wealth; it is triggered by wealth. Perhaps the old adage "the rich get richer" is a truism. If New Zealand wants to get generally entrepreneurial then it needs to be generally richer. Dr Callaghan makes the point that New Zealand has its success stories. Weta Workshops is a great example. However, I think that Weta shows that the really strong plants can survive in all but the most dessicated of deserts. The point isn't that the desert can have life. The point is that a desert will only become a jungle if its whole climate changes.
Unfortunately, I think scale is also important. Silicon Valley gestates so many good ideas because it has many well educated, connected, wealthy people. New Zealand could only achieve this kind of scale in a city the size of Auckland, but Auckland is spread out. Much of Auckland doesn't even consider itself one city.
Can the next Google come from New Zealand? Yes, it could. It is, however, very unlikely. It is most likely to come from where it has come before. A jungle of growing entrepreneurism is most likely where there is already some wealth. Where there is both scale and intensity. Where there is passion and optimism. And, where there is excellence and pride in learning and knowing.
It is worth listening to Dr Callaghan. If we do some things better then we should improve our technological development. However, this will only improve things, I fear, at the margin. To make a big difference in New Zealand's fortunes would need reforms far more fundamental. Ones we may not actually be willing to make; and certainly not the sophistry preached by our political elite.
Unfortunately I haven't helped Dr Callaghan much. So far I haven't been able to establish a strategic advantage that stands out that New Zealand could leverage internationally. Those countries that established high technology economies did so because the timing was right and they took their opportunities. Most did it because they had a history of it, some were already wealthy and sought to diversify at the right time and some were opportunists. New Zealand is probably 30 years (maybe even 40 years) late in its attempt to go high technology (except in agriculture which we already do). Still, as I feel I have let Dr Calaghan down I have asked myself the question "Why wouldn't the next Google grow in New Zealand?"
Everyone wants a Google. Google is high technology, it is very 'weightless' and it is enormously successful. In theory a Google could happen anywhere but Googles don't happen everywhere they (if we include Microsoft, Apple and the plethora of Electronic Arts, Facebooks, MySpaces, etc) they happen in one place - the west coast of the United States (technically Facebook started on the east coast but is now based on the west coast).
So how did Google start? It all started as a research project at Stanford University for Larry Page, who was joined by Sergey Brin. They explored a different method for prioritising web searches, successfully. Then they put the software into online production, founded the website and the company, raised $1.1million dollars, identified the profit making business model and exploded into massive success. Pretty easy really - although obviously it isn't.
Professor Jim Collins of Harvard published his key principles of building a great business and Page and Brin followed it exceptionally well. They were really good at what they were doing. They were passionate about it and started the business and raised the capital and then they worked out how to make money from it. Google also ticks the strategic marketing boxes - create a demand no-one knew they wanted, mass-customise it for both demand and supply, suppliers flock to you, clip the ticket. Think how successful this is by also considering Sony's Playstation and Apple's Ipod (or Iphone). Create something people want, make it accessible to both customers and alternative suppliers with as much flexibility and capability as you can. Clip the ticket. Page and Brin went one better. They tapped into the enormous content of the internet and made it freely available. Free supply and free demand means huge use. Work out that the same technology that makes the search engine so successful will also be perfect for automatically matching advertisers to people searching for their stuff and there you have a new economic empire.
But how did two students manage to suddenly become software corporate superstars (in a story not too different from Microsoft by the way)? Well, let's not underestimate Stanford whose alumni are also responsible for Nike, Hewlett-Packard, Electronic Arts, Sun Microsystems, Nvidia, Yahoo!, Cisco Systems and Silicon Graphics. Is it an accident that Silicon Valley grew up around Stanford?
How about the environment? I can't remember the article but I remember reading about the environment of places like Seattle and Palo Alto. The young people are published and known to the industry and the cafes, shops and general environs are full of the top guns. These are safe and pleasant environments where everyone mixes. People meet, deals are done and ideas flourish. In what environment in New Zealand would two students meet the founder of Sun Microsystems (or equivalent) who would then decide that he liked their ideas and hand over a check for US$100,000?
Interestingly it wasn't Google who worked out (technically) how to make money from advertising, it was a crowd called Overture (originally Goto.com) who were bought by Yahoo! A legal battle ensued between the two competitors and resulted in a deal that I just don't think could ever be done in New Zealand. Google got the final piece in their business model puzzle and Yahoo! got a share of the Google action. I feel confident that such a battle in New Zealand would have gone on (bitterly) for ever in the courts to the detriment of both parties. Some might argue that Google got the better of the deal but Yahoo! got a share of that success and went on to find their own niche.
Then Google went on to the second stage of its success story. Stay true to the business model (free service to internet demand and clip the ticket on advertising and supply) but be prepared to buy the new ideas (such as Google Earth).
So why wouldn't it happen in New Zealand? What would we need? A couple of brilliant PhD students with a good idea, a world leading University, an almost cultural attitude to entrepreneurism (a desire to be good at something, to be passionate about it and how to make money), an environment of good ideas, collaboration and some spare money, an attitude of getting the deal done and getting on with it and lots more available good ideas.
And what does New Zealand have? Apparently we have the students. New Zealand ranks well in the world for education quality (although we also manage to have quite high levels of illiteracy - ie we're good and bad). Supposedly we have the good ideas but we are under represented in patents, which suggests that we either don't have the good ideas or we don't follow through.
We don't have the world leading universities. We have universities that are dedicated to fractious infighting under a funding system that makes them scrap for morsels. We have universities expending enormous effort in explaining why they should get public money rather than demonstrating that they should get public money. We have universities almost completely divorced from business (although this is as much business fault as the universities); and when they do collaborate it is again to fight for the public purse. We have universities rooted, for all practical purposes, in medieval fuedalism. Only the heriditary lordships are gone, instead the lordly posts are given out on time served without being difficult.
Dr Callaghan suggests that a major problem with entrepreneurism in New Zealand is cultural; and I agree. New Zealanders like to be good at things (to an extent) but one should never ever be proud and passion is for those foreign types. Part of New Zealand is almost calivinist in its attitude. Only those who suffer in their work are morally worthy. No wonder the young people of New Zealand want to go overseas to experience life while they are young. New Zealand may be a great place to live but it is a crap place to work. Academically gifted New Zealanders who manage to escape the medieval fiefdoms become destined to either give in to the technocratic bureaucracies of political Wellington or the technochratic bureaucracies of corporate Auckland; or go overseas. In the absence of a passion of purpose then the need to make money becomes devoted to the passion of consumption.
In terms of the rest of the environmental piece, the good ideas, the collaboration, the spare money and the positivist attitudes; well I think that this comes only when a country is rich. History suggests this strongly. The Renaissance was triggered by wealthy patrons who had the leisure time to take an interest themselves. The scientific discoveries of the Reformation and the Enlightenment were triggered by wealthy patrons (who often had the leisure to do the science themselves). The great thinkers of the enlightenment were either proteges of wealthy patrons or wealthy landowners themselves. The industrial revolution was triggered again by wealthy patrons (who again often did the science themselves). The great American universities, schools and museums were nearly all created by philanthropy during the United States great wealth boom.
Entrepreneurism isn't, I think, the trigger of wealth; it is triggered by wealth. Perhaps the old adage "the rich get richer" is a truism. If New Zealand wants to get generally entrepreneurial then it needs to be generally richer. Dr Callaghan makes the point that New Zealand has its success stories. Weta Workshops is a great example. However, I think that Weta shows that the really strong plants can survive in all but the most dessicated of deserts. The point isn't that the desert can have life. The point is that a desert will only become a jungle if its whole climate changes.
Unfortunately, I think scale is also important. Silicon Valley gestates so many good ideas because it has many well educated, connected, wealthy people. New Zealand could only achieve this kind of scale in a city the size of Auckland, but Auckland is spread out. Much of Auckland doesn't even consider itself one city.
Can the next Google come from New Zealand? Yes, it could. It is, however, very unlikely. It is most likely to come from where it has come before. A jungle of growing entrepreneurism is most likely where there is already some wealth. Where there is both scale and intensity. Where there is passion and optimism. And, where there is excellence and pride in learning and knowing.
It is worth listening to Dr Callaghan. If we do some things better then we should improve our technological development. However, this will only improve things, I fear, at the margin. To make a big difference in New Zealand's fortunes would need reforms far more fundamental. Ones we may not actually be willing to make; and certainly not the sophistry preached by our political elite.
Sunday, November 22, 2009
The spread of wealth of nations
This post has taken me ages and I'm not sure it was worth it. It began because I was interested in understanding better how New Zealand's reducing relative wealth might manifest in a social sense. This lead me on a quest to better understand how wealth and the distribution of wealth affects a country. I'm not sure that I have reached any useful conclusions but it was an interesting voyage where I did at least learn a few things.
Let me start by, once again, remarking on the availability of data. One would think that the governments of the world's free countries would be interested in making data about their country available. I can't comment on many countries but if New Zealand and Australia are anything to go by then most governments are far from the forefront of data presentation on the internet.
One might expect that international organisations such as the United Nations might not only make data available but also provide good comparative data. However, it would seem that the United Nations is only interested in providing data once it has been 'correctly' interpreted by their experts.
I had high hopes for the likes of WolframAlpha and my solid fall back the CIA World factbook. The problem for WolframAlpha is that the world's data is horribly fragmented and unless someone sorts it out properly it is unuseable. The CIA, it turns out, seems to be the most open, available, transparent and objective supplier of world data - who knew? Nevertheless, even the CIA can't publish data that isn't there, which comes back to the problem of countries not being very open about their own data. For example (according to the CIA World Factbook), 237 countries publish their population data, 227 publish their GDP, 205 publish their external debt, 107 publish their current account balance and 133 publish their GINI index (a measure of the evenness of income distribution).
Anyway, I was interested in the perennial discussion of fairness vs wealth. Therefore, I wanted to look at the GINI index vs GDP per capita. The GINI index is a measure of inequality. It determines how far away a country's income distribution is from perfectly equal (everyone earns the same). A GINI of zero means that every household has the same income and a GINI of 100 means that one household earns the country's entire income. Published world GINI numbers vary from 70.7 to 23, which is quite a spread.
My hypothesis is that rich countries will tend to be more equal than poor countries. This was on the basis that prosperity spreads when people spend and a willingness to share comes from income surpluses. As the chart below shows there is a general relationship between individual wealth and the evenness of income distribution but it isn't as strong as I expected.
It certainly seems that being rich is the best indication of being likely to have a more equal income distribution but there is a lot of variation. The interesting thing is that poor countries have pretty much a random outcome with respect to income distribution. It should be noted here, however, that many countries do not publish their GINI indexes. The tax havens are absent as are some of the most oil rich nations in the world.
My second hypothesis was that the attitudes of a society are driven by its middle income earners. That is say that when a majority of people are well off then wealth spreads but if not then everybody, including the rich, tends to hoard. This is where finding data got very hard. The GINI index is relatively widely published and aggregated but this is about the limit of readily available income data. I probably could have searched through each country's data to find the morsels I was looking for but I would still be doing this well after Christmas and time is a scarce commodity. Therefore, I used what I had. GDP and population data provide an indication of the quantum of income and the GINI index tells us about shape. By doing some curve fitting I was able to come up with some interesting comparisons. These results are too inaccurate to publish any numbers but they did help lead to some logical conclusions.
The first thing that became obvious is just how poor some countries are. Many people already know this but in making comparisons it became more real for me. For example, (based on financial wealth only) one would rather be poor in Malaysia than rich in Ethiopia (and the poor of Malaysia are pretty poor). Here it becomes obvious why the equality of income distribution is random in the very poorest countries, because here the evenness of income distribution is meaningless. Zimbabwe is a very unequal country (a GINI of 50.1) and Ethiopia is a surprisingly equal country (GINI of 30). However, Zimbabwe's inequality is a distribution between those that have practically nothing and those that have the merest pittance. Zimbabwe is poor even compared to Ethiopia. The distribution of wealth in Zimbabwe probably comes down to which village's goat survived the drought season.
It is interesting to note the other extreme as well. Those countries that are very rich. A pertinent example is that one would rather (considering financial wealth only) be poor in Norway or Luxembourg than middle income in New Zealand. In fact, one would rather be poor in Luxembourg than middle income in the US, which is saying something. But richness is when the equality of income does matter. Here we look at the three outliers (of the countries that report GINI) Hong Kong, Singapore and the US. Here are rich countries that are also very inequal.
Here there is evidence that wealth can offset inequality. Not so much Hong Kong but the poor of Singapore and the US are still much better off than most of the world. The poor of New Zealand may only be marginally better off than the poor of Singapore and are roughly equivalent with the poor of the US. But, the rich of Hong Kong, Singapore and the US make the rich of New Zealand seem pretty poor. The rich of these countries even match (and probably exceed in the case of Singapore and the US) the rich of Luxembourg. They are the uber-rich. One can only imagine the numbers that would come out of the tax havens (no wonder they don't report).
Of the world's countries there are some which don't really have a poor. All countries will have a number of people who unfortunately or deliberately fall through the cracks. Nevertheless some countries have poor who generally aren't really poor. The line is obviously somewhat arbitrary but in my view these are countries who don't have a general poverty problem. There are the outliers, of course, Luxembourg (who is benefitting from centuries of careful diplomacy playing off its larger neighbours) and Norway (the most democratic and free of the oil rich nations) who really don't have a general poor. But I think you can add to these two Iceland, Sweden, Denmark, Austria, Belgium, Ireland, Germany, Netherlands, Slovenia, Finland, Australia, Canada and Switzerland. There are some close seconds but the numbers fall away quite quickly (there is quite a lot of difference even between Iceland and Switzerland).
What do these countries have in common? They are relatively rich and relatively equal. They are all democracies and most of them are Western European. Two of them (the I-lands) have been hit very hard by the world recession but still feature high. They vary in their economic leaning from Sweden (quite left of centre) to Switzerland (quite right of centre). They do not have large populations, except for Germany which has almost three time Canada's (no. 2)population. One of them (Slovenia) has recently been freed to democracy and is tearing up the economic growth charts. Two of them are former British colonies that maintain a Westminster parliament system (New Zealand alone fails to represent in this group).
It is inconclusive what makes these countries both fair and rich. Some on the left might argue that these countries are rich because they are fair. This doesn't seem right to me. Ethiopia is very fair but almost the whole population would rather be poor in the United States (or New Zealand). Kyrgyzstan is much wealthier than Ethiopia and is almost as fair but (based on financial wealth only) most of the population would still rather be poor in the US. Albania is much richer again than Kyrgyzstan, and is also fairer, but about half the population would be better off being poor in the US. The United States, Hong Kong and Singapre prove that wealth doesn't necessarily translate to equality of income but I think that it is still the right place to start.
So, what of New Zealand? I think New Zealand properly belongs to the group which includes Japan and the United States. All three of these countries are countries that have been relatively richer than they are now. All three feel that things are slipping away from them. All of them show some degree of a middle income bracket that are tightening their belts and hardening their hearts. All three have poor who are just on the edge of comfortable subsistence and with many more people falling into poverty as time passes. All three are relatively high on the inequality stakes (especially the US). All three, I think, are going to experience significantly more social upheaval and distress as population increases and economic growth doesn't match the rest of the world.
And which are the lucky countries? Norway is, perhaps, the clue. Luxembourg is a very special example but Norway is a real economy. Norway is a resource rich country with a relatively small population. The moral hazard with this post is that I have to firmly remind myself of the non financial benefits of living in New Zealand to avoid packing my bags and heading for Australia or Canada.
Sunday, November 15, 2009
It is about freedom of speech
Obviously there have been many copious amounts of opinion pieces on the Hone Harawira affair. I have actually been strugging to make sense of it all. It seemed mostly to be a storm in a teacup to me. However, now I do feel much more strongly about it thanks to the opinion piece by Tapu Misu (http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10609430).
Ms Misu's piece is, by far, the best opinion of an otherwise pretty poor bunch. Hers is the best because she has hit the nail directly upon the head. It is about freedom of speech. It is about one of the most fundamental of our constitutional protections. And, as Ms Misu also implies, it is also about representation.
Most of the response to Mr Harawira's comments have been the worst kind of political correctness. Political correctness can have its place. In its least objectionable form then political correctness calls into question langauage that is needlessly disrespectful and insulting; and, in fact, this is exactly what Mr Harawira did apologise for. In its worst form political correctness is censorship. Censorship, it should be remembered, has done far more for Fascism and Stalinism (and other forms of authoritarianism) than it has ever done for freedom or democracy.
Mr Harawira is an angry man but he believes in something and forcing him not to say what he believes in doesn't make it go away. But, Mr Harawira is more than an angry man. He represents angry people who consider, with some merit, that they have a genuine grievance. The whole point of a representative system of democratic parliament is that all points of view are to be represented broadly in proportion to the population. Trying to force Mr Harawira to be silent on these issues is failing to represent a significant proportion of our population that wants their say.
Mr Harawira has apologised, genuinely I think, for being needlessly disrespectful and insulting; but not for the sentiment. Perhaps, rather than going down the extremely dangerous path of trying to control what he says, we should accept his apology and listen to those that have such a view. I'm not sure that I agree with the constituents of Mr Harawira's point of view but I sure as hell think that they should be represented in parliament.
The really bizarre thing is that this whole storm began simply around a sneaky day off. A bad thing perhaps but is it for this that the fabric of representative democracy should be ripped to shreds?
Ms Misu's piece is, by far, the best opinion of an otherwise pretty poor bunch. Hers is the best because she has hit the nail directly upon the head. It is about freedom of speech. It is about one of the most fundamental of our constitutional protections. And, as Ms Misu also implies, it is also about representation.
Most of the response to Mr Harawira's comments have been the worst kind of political correctness. Political correctness can have its place. In its least objectionable form then political correctness calls into question langauage that is needlessly disrespectful and insulting; and, in fact, this is exactly what Mr Harawira did apologise for. In its worst form political correctness is censorship. Censorship, it should be remembered, has done far more for Fascism and Stalinism (and other forms of authoritarianism) than it has ever done for freedom or democracy.
Mr Harawira is an angry man but he believes in something and forcing him not to say what he believes in doesn't make it go away. But, Mr Harawira is more than an angry man. He represents angry people who consider, with some merit, that they have a genuine grievance. The whole point of a representative system of democratic parliament is that all points of view are to be represented broadly in proportion to the population. Trying to force Mr Harawira to be silent on these issues is failing to represent a significant proportion of our population that wants their say.
Mr Harawira has apologised, genuinely I think, for being needlessly disrespectful and insulting; but not for the sentiment. Perhaps, rather than going down the extremely dangerous path of trying to control what he says, we should accept his apology and listen to those that have such a view. I'm not sure that I agree with the constituents of Mr Harawira's point of view but I sure as hell think that they should be represented in parliament.
The really bizarre thing is that this whole storm began simply around a sneaky day off. A bad thing perhaps but is it for this that the fabric of representative democracy should be ripped to shreds?
Wednesday, October 28, 2009
The Lucky Country?
This post follows my previous post that was considering the question of how much influence agricultural resources influence New Zealand's economy. This post considers the influence of mineral resources to Australia. Both posts are in reaction to a speech by Dr Don Brash available at:
http://www.nzcpr.com/guest168.htm
In looking at the Australian statistics differences to Statistics NZ are interesting. Australia's GDP is better broken down into component industries but New Zealand has more imformation on the contribution to manufacturing and trade categories. The statistics only seem to be broadly comparable. ABS (Australian Bureau of Statistics) seems to be partial to nominal dollars while Stats New Zealand seem highly partial to their 95/96 real dollars which can also make things tricky.
The first obvious thing is that Dr Brash had incorrect information in his speech. He claimed that mining is about 5% of Australia's GDP but it is closer to 8%. It will be no surprise to anyone that Australia's mining industry is very much larger than New Zealand's, so big in fact that it would be fair to say that (compared to Australia) New Zealand doesn't have a mining industry. If we add agriculture, forestry, fishing and mining together to arrive at a ball park number for the current annual value of developed natural resources then New Zealand has about NZ$37billion (nominal) and Australia about A$133billion (nominal). Using an exchange rate of 84c and with population estimates of 4.3million for New Zealand and 22million for Australia then New Zealand currently has natural resource wealth of roughly NZ$8,600 per capita and Australia NZ$6,100 per capita. So Dr Brash seems to be correct. If anything New Zealand has the natural resource advantage in wealth per capita. But does Australia's mineral wealth leverage greater wealth overall?
Another obvious factor in Australia's GDP is their construction industry. Compared to New Zealand it is massive, approximately 12 times New Zealand's (way more than can be explained by population). The Australian electricity, gas and water contribution is also significantly higher than New Zealand's. Australia also seems to perform better in personal and community services (education, health, recreation, culture, etc). Most other parts of the economy seem to be broadly comparable.
I don't have the time or energy to put much more effort into investigating the leverage of mineral wealth in the Australian economy; and I still have to look at exports. If my assertion holds from my previous post; that it makes sense that an economy would naturally become expert in industries surrounding its natural resources then perhaps it shouldn't be a surprise that Australia does so much construction. In theory developers should consider the opportunity cost of minerals (ie compare their internal use to what they could sell the resources for). In practice, however, people (and politicians) will want to use cheap resources to their personal direct benefit. Perhaps this is why there is so much construction in Australia. Some forms of energy are not easily transported great distances. Electricity and natural gas have, effectively, far lower opportunity cost than easily transported oil and coal. This gives Australia very cheap access to energy and this must stimulate significant output leveraged value adding activity in Australia.
I am not going to put much effort into exploring the input industries for Australia's mining activities. Mining is a resource intensive activity and it must drive significant levels of economic activity to supply. Australia's mineral exports are A$140billion compared to a GDP mining value add of A$85billion. Therefore, without even considering internal consumption, mining must generate at least A$55billion of other economic activity in Australia. New Zealand's whole economy (in GDP terms) is currently NZ$180billion. It seems intuitively obvious (my empirical analysis isn't comprehensive enough to be conclusive) that Australia's mineral wealth does translate to relatively more financial wealth than New Zealand's agricultural resources.
In the area of personal and community services these are not, as a rule, stimulated by resource availability. They tend to be, predominantly, luxuries (there is of course a basic level of need in health and education but I suspect that Australia's health system is supported by far more elective procedures than New Zealand's). Luxuries (especially imported luxuries) are funded by cash surpluses and cash surpluses generally come from exports. Not surprisingly Australia's exports are much larger than New Zealand's. For the purposes of this debate I will only look at goods, although services also seem to be consistent with the export story in goods. Australia has A$230billion of goods exports compared to New Zealand's NZ$43billion. Normalised for currency and population this gives Australia about a quarter more export dollars than New Zealand. Not massive but significant. Interestingly mineral and metal exports contribute 60% to Australia's exports but agriculture only contributes something in the order of a quarter of New Zealand's exports.
On the face of it Dr Brash is correct but I think he is wrong. Australia's mineral wealth does give it a large advantage over New Zealand in terms of financial wealth. How does this resolve to New Zealand's greater natural resources per capita? It does because financial wealth is different to the total consumer benefit (the totality of health, wealth, well-being and happiness). Australia's financial wealth directly affects their consumer benefit. Money can't buy you happiness but it sure can buy you a lot of things that make you happy. New Zealand, on the other hand, has a lot of things that make you happy. This is why New Zealand regularly features at the top of lists of desirability to live despite relatively low first world levels of financial wealth.
This will make it very hard for New Zealand to grow financial wealth. Our natural resources seem to be fully leveraged with only marginal opportunities available. We don't appear to have any other strategic international advantages. We are still wealthy in a consumer benefit sense and we are a lucky country in that sense. However, if we want to increase our GDP per capita comparably to other first world countries (and avoid diluting our consumer benefit) then increasing the GDP bit probably isn't going to work. It's time to look at the per capita bit.
http://www.nzcpr.com/guest168.htm
In looking at the Australian statistics differences to Statistics NZ are interesting. Australia's GDP is better broken down into component industries but New Zealand has more imformation on the contribution to manufacturing and trade categories. The statistics only seem to be broadly comparable. ABS (Australian Bureau of Statistics) seems to be partial to nominal dollars while Stats New Zealand seem highly partial to their 95/96 real dollars which can also make things tricky.
The first obvious thing is that Dr Brash had incorrect information in his speech. He claimed that mining is about 5% of Australia's GDP but it is closer to 8%. It will be no surprise to anyone that Australia's mining industry is very much larger than New Zealand's, so big in fact that it would be fair to say that (compared to Australia) New Zealand doesn't have a mining industry. If we add agriculture, forestry, fishing and mining together to arrive at a ball park number for the current annual value of developed natural resources then New Zealand has about NZ$37billion (nominal) and Australia about A$133billion (nominal). Using an exchange rate of 84c and with population estimates of 4.3million for New Zealand and 22million for Australia then New Zealand currently has natural resource wealth of roughly NZ$8,600 per capita and Australia NZ$6,100 per capita. So Dr Brash seems to be correct. If anything New Zealand has the natural resource advantage in wealth per capita. But does Australia's mineral wealth leverage greater wealth overall?
Another obvious factor in Australia's GDP is their construction industry. Compared to New Zealand it is massive, approximately 12 times New Zealand's (way more than can be explained by population). The Australian electricity, gas and water contribution is also significantly higher than New Zealand's. Australia also seems to perform better in personal and community services (education, health, recreation, culture, etc). Most other parts of the economy seem to be broadly comparable.
I don't have the time or energy to put much more effort into investigating the leverage of mineral wealth in the Australian economy; and I still have to look at exports. If my assertion holds from my previous post; that it makes sense that an economy would naturally become expert in industries surrounding its natural resources then perhaps it shouldn't be a surprise that Australia does so much construction. In theory developers should consider the opportunity cost of minerals (ie compare their internal use to what they could sell the resources for). In practice, however, people (and politicians) will want to use cheap resources to their personal direct benefit. Perhaps this is why there is so much construction in Australia. Some forms of energy are not easily transported great distances. Electricity and natural gas have, effectively, far lower opportunity cost than easily transported oil and coal. This gives Australia very cheap access to energy and this must stimulate significant output leveraged value adding activity in Australia.
I am not going to put much effort into exploring the input industries for Australia's mining activities. Mining is a resource intensive activity and it must drive significant levels of economic activity to supply. Australia's mineral exports are A$140billion compared to a GDP mining value add of A$85billion. Therefore, without even considering internal consumption, mining must generate at least A$55billion of other economic activity in Australia. New Zealand's whole economy (in GDP terms) is currently NZ$180billion. It seems intuitively obvious (my empirical analysis isn't comprehensive enough to be conclusive) that Australia's mineral wealth does translate to relatively more financial wealth than New Zealand's agricultural resources.
In the area of personal and community services these are not, as a rule, stimulated by resource availability. They tend to be, predominantly, luxuries (there is of course a basic level of need in health and education but I suspect that Australia's health system is supported by far more elective procedures than New Zealand's). Luxuries (especially imported luxuries) are funded by cash surpluses and cash surpluses generally come from exports. Not surprisingly Australia's exports are much larger than New Zealand's. For the purposes of this debate I will only look at goods, although services also seem to be consistent with the export story in goods. Australia has A$230billion of goods exports compared to New Zealand's NZ$43billion. Normalised for currency and population this gives Australia about a quarter more export dollars than New Zealand. Not massive but significant. Interestingly mineral and metal exports contribute 60% to Australia's exports but agriculture only contributes something in the order of a quarter of New Zealand's exports.
On the face of it Dr Brash is correct but I think he is wrong. Australia's mineral wealth does give it a large advantage over New Zealand in terms of financial wealth. How does this resolve to New Zealand's greater natural resources per capita? It does because financial wealth is different to the total consumer benefit (the totality of health, wealth, well-being and happiness). Australia's financial wealth directly affects their consumer benefit. Money can't buy you happiness but it sure can buy you a lot of things that make you happy. New Zealand, on the other hand, has a lot of things that make you happy. This is why New Zealand regularly features at the top of lists of desirability to live despite relatively low first world levels of financial wealth.
This will make it very hard for New Zealand to grow financial wealth. Our natural resources seem to be fully leveraged with only marginal opportunities available. We don't appear to have any other strategic international advantages. We are still wealthy in a consumer benefit sense and we are a lucky country in that sense. However, if we want to increase our GDP per capita comparably to other first world countries (and avoid diluting our consumer benefit) then increasing the GDP bit probably isn't going to work. It's time to look at the per capita bit.
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