Economic lessons to be learned from losers

By BRIAN FALLOW

A look at other small economies, both successful and struggling, suggests there is no magic formula to deliver economic success.

Treasury economist Struan Little has looked at some of the richest OECD members - Denmark, Finland, Ireland and Iceland - and at comparative losers with which New Zealand has much in common - Uruguay (also reliant on agriculture), Switzerland (twice as rich as NZ but with an even lower growth rate), Tasmania and the maritime provinces of Canada.

"The experiences of Finland, Denmark and Ireland tell you there is no single formula to get rich."

The Irish path involved state involvement in industry assistance. The Finns emphasised technology and the role of the state in supporting research. The Danes combined a liberal economic policy with high levels of social protection.

"Just as importantly, all these paths [especially Ireland's] have been tried in places like Tasmania and Atlantic Canada and have largely failed," Mr Little says in a paper called "Lessons from the Losers".

Research and development helped Finland and Denmark to do well but it was not a prerequisite for success.

"There are good reasons why small countries will not be R&D-intensive," Mr Little says. These include:

* Technology is risky; an R&D strategy may back the wrong horse.

* R&D is costly and only the largest firms are able to do it.

* A small domestic labour market will constrain the amount of R&D undertaken.

* Technological spillovers are likely to benefit other countries as much as residents.

New Zealand's data looks bleak at first glance, Mr Little says, with R&D spending by the business sector a fifth of the OECD average.

But although New Zealand does not appear to do much R&D it seems to adopt technology quickly and be well placed to use it for business growth.



Currency union is no panacea.

"The experience of Tasmania and the Atlantic provinces of Canada suggest that the benefits of currency union are not sufficiently great to support growth. In the sample, it is countries like Iceland and Denmark, which have stood apart from common currency arrangements, that have exhibited better performance."

Denmark, Finland, Ireland and Iceland have enjoyed much less volatility in their exchange rates than New Zealand.

"For example, since 1984 the Irish real exchange rate moved in a 16 percentage point band while the equivalent New Zealand figure was 36 per cent. I see this as one of the key reasons our export performance has been relatively weak."

Industry policy, cited as a key to Ireland's success, has not done the trick in Tasmania or the Atlantic provinces of Canada. Both offered inducements to large firms but found that firms prepared to come were also prepared to leave.

Mr Little says one thing that does matter is social consensus.

Tasmania has a deep social split between the traditional resource-based development lobby and conservationists. Switzerland has been rich for so long that it is hard to muster support for a change in approach despite the evidence that it is treading water.

"I cannot help but wonder whether these deep social fractures from both Tasmania and Switzerland are also present in New Zealand."

In income distribution (the gap between rich and poor), New Zealand looks much more like the United States or some Latin American countries than other OECD countries.

"This may be part of the reason New Zealand finds it difficult to make painful adjustments, as the cost of those adjustments is met less evenly than in other OECD countries."