The briefcase I
use to carry my papers and laptop to meetings bears a multi-coloured logo and the words “Catching the Knowledge Wave”.
As Fran O’Sullivan recalls, the outcomes produced by that high-level conference in 2001 - designed to unlock
the secrets of economic success as overseas luminaries revealed brilliant ideas and initiatives that had hitherto eluded us
– proved disappointingly humdrum.
turned out that there were few mysteries to divulge. The explanations for economic success were all too
obvious and commonplace. Ireland, for example, in whose apparent prosperity there was a great deal of interest,
was the beneficiary of European Union largesse which created an asset bubble that eventually burst. Australia,
as has become increasingly clear, has the great advantage of being able to dig up its barren interior and sell the product
to a mineral-hungry world.
are equally obvious. Developing economies like China and India now, and Japan and Korea before them, do well if they can access
mass international markets and exploit economies of scale by combining cheap and plentiful labour with rapidly growing technological
mature economies that focus on re-investing in new wealth creation, like Germany, will do better than those, like Britain
and now the US, that give priority to the protection of existing asset values and to consuming more than they produce.
Developed economies that suddenly
benefit from a new source of wealth, like the discovery of oil, will do badly if they simply spend the proceeds through allowing
the exchange rate to appreciate – as the British and the Dutch did, as the Australians may be in the process of doing
with high mineral prices, and as we are in danger of doing with high commodity prices.
Those, like Norway on the other hand, that invest the proceeds
in new assets so that they go on producing wealth after the initial benefit has dissipated, can enjoy a long-term benefit
to economic development.
Yet, despite these
commonsense conclusions, we in this country still persist in seeking the magic elixir that will propel us into the economic
top league. We still believe that one more Jobs Summit, one more nostrum from the latest management guru,
one more ministerial exhortation to improve productivity, one more brilliant new piece of research, will do the trick.
We have been unwilling to face an obvious truth –
that economies are such large, complex and multi-faceted fields of activity that it is very unlikely that single, focused
initiatives – even if worthwhile - will make much, if any, difference.
Of much more importance in determining whether economies perform well or otherwise, and whether or
not they are stimulated to innovate and develop, is the broad context in which they operate. It is that
context we should focus on. But that is precisely what we’re not prepared to do.
There are of course some contextual factors, such as the
terms of trade, we can’t control. But even when those factors are, as they are today, the most favourable
in nearly thirty years, we still manage to negate that advantage by allowing the rising dollar to reduce the return to our
primary producers and to create a two-speed economy by penalising the rest of the productive sector.
And we insist that every such improvement in our national income is an inflationary
threat, rather than an opportunity to strengthen our productive capacity. It is as though we have no faith
in the propensity of a market economy to grow and develop.
But it is when it comes to managing those factors that we can control that we fail most spectacularly.
We kid ourselves that we are focused on the need to save, invest and export more, and that we must consume, borrow
and import less. But our policy settings actually encourage exactly the opposite.
Our narrow focus on inflation means that every opportunity
for growth is sacrificed to shackling the inflation bogey. The decades-long use of high interest rates
means that investment is constantly deterred. And because perennially high interest rates create an over-valued
dollar that buys in the short term more than it should, we encourage people to consume rather than save and to import rather
than invest in our own productive capacity.
poor return on productive investment –and the high dollar means that margins and market share are
driven down, and our productive sector is less profitable than it should be - further discourages saving and investment, other
than in non-productive assets like housing, where asset inflation is fuelled by reckless bank lending. Our
attempt then to maintain a standard of living that our poor performance means we cannot afford makes overseas borrowing and
asset sales more and more necessary.
These are not short-term issues. They have been endemic for nearly three decades. And we are about
to do it all again, as overseas opportunists drive up our dollar, confident on the basis of thirty years’ experience
that we will be stupid enough to continue to pay them a premium.
If we really want to change our fortunes, these are the issues we must address. Instead
of vainly looking for the silver bullet, what about catching the commonsense wave?
11 June 2011
This article was published in the NZ Herald
on 14 June.