NZ Institute Report Should Be Obligatory Reading For Politicians

The New Zealand Institute has written a report entitled A Goal is not a Strategy: focusing efforts to improve New Zealand's prosperity. You can see a copy of the report here.

The title is a swipe at the National Government's goal to close the income gap with Australia by 2025, even though there appears to be no plan to achieve that goal. The report is also critical of the 2025 Taskforce and ideologically-driven market liberalism generally. It is a genuinely refreshing read on the state of our economy and what we can do to increase economic growth.

The report pins much of the blame for our poor performance on an over-reliance on economic liberalism. Some features of economic liberalism are necessary and desirable, but a blind adherence to liberal policies has harmed our economy. 

The report identifies the ten standard prescriptions for economic liberalism followed by many western governments. They include: fiscal policy discipline, government focused on core services only, tax reform, market determined interest rates and exchange rates, liberalisation of trade and of inward foreign direct investment, privatisation of state-owned assets, market deregulation, and secure property rights.

The report favours an alternative approach to economic liberalism, labelled the "diagnostic approach". Essentially, the diagnostic approach moves away from ideology and looks at the country-specific binding constraints on economic growth. In this way the policies adopted by each country will be unique, because conditions are different in every country. That is a very different approach to the one taken by the economic liberals, whose prescription is always the same (cut taxes, sell assets, cust government spending, deregulate etc), regardless of conditions.

Examples are given of Asian economies that have applied a "diagnostic" approach. These countries have identified issues specific to them, and have not been afraid to intervene in areas where market liberalism would prescribe non-intervention.

The diagnostic approach may sound like plain common sense, but the neo-liberal acolytes running National and ACT Government are not kindly disposed to adoping any methodology besides the one they understand. Their minds are generally closed to other ways of doing things. You can see this clearly in the 2025 Taskforce Report. Its recommendations were based entirely on liberal economic theories. While John Key has distanced himself from those recommendations, one senses that he has only done so because they are politically unsaleable, not because he disagrees with them.

The New Zealand Institute report looks at our low rates of productivity and examines the reason for those low rates. One of the main reasons for low growth it identifies is our over- reliance on commodity exports. Commodity prices are fickle, and this means the value of our exports, compared against the OECD average, continues to slide. We will not arrest this slide unless we invest more in high value exports. That is why the value of our exports compared to the OECD average is so poor.

The report notes that we would be better off growing the market for high-value exports, such as niche manufacturing, or the manufacturing of value-added primary produce. ICT is also an area where we can do well, and where our distance to market is not such a problem.

It is sobering to think that we were once a wealthy nation. The shock of the UK entering the EU in the early 1970s was catastrophic, and we responded to that challenge extremely poorly. The head-in-sand policies of the Muldoon government set New Zealand back by decades, and meant the reforms of the '80s and '90s were more painful than they needed to be. Things have steadied since 1990, but we have not seen any rise in our fortunes when compared with other countries.

Productivity is also stifled by the shortage of capital. We have some good entrepreneurs and risk-takers, but our poor savings records and addiction to overseas debt mean there's little money for new ventures or new businesses. The only money readily available is from banks, and banks are conservative lenders. We also tend to rate our management skills more highly that can be reasonably justified. Overseas reports have suggested we have a shortage of good managers, and this is constraining many of our companies.

We are also poor at commercialising innovation. We're good at inventing and coming up with bright ideas, but terrible at taking them to market. This is partly due to a lack of capital, but there are a lot of other reasons for this lack of success, which the report does not address. I've written extensively on these before.

We can also do better on the education and skills front. We still have too many people leaving school without basic skills. And many who are highly skilled choose to ply their trade overseas.

These things can be improved if governments are prepared to invest in education and training. Unfortunately, the narrow focus of the current regime on standards, while cutting funding to adult education, suggests this is a low priority.

It will not be easy to fix our poor capital markets. A tradition of deregulation and of speculation in real estate, and an addiction to overseas borrowing, has left our capital markets in a parlous state. A move to encourage savings may help, and there are clear signs both major political parties have this on their agendas. There is also some work being done on capital and securities market reform at the moment. Unfortunately, only a few of the incentives to invest in real estate have been taken away.

This report is a good reminder of how flawed our current economic model is. For the last 25 years we've been told that the key to economic growth is tax cuts, deregulation, and a reliance on the market. This report reminds us that market liberalism simply won't work, unless it takes into account the unique challenges we face as a nation.

We are still driving in reverse: obsessing over tax cuts, cutting red tape, and reducing government spending. Key's government is at least "taking a look" at a few things, such as compulsory savings, and capital market reform. But Key seems to lack the nerve to make tough decisions*, so I am not hopeful we will see the "step-change" Key keeps talking about any time soon.

* To be fair to Key, it's not as if Labour's nine years in power saw much change on many of these critical issues.