If you are going to prescribe a course of radiation and chemotherapy to shrink the state, you need to be very sure of your diagnosis, says Brian Fallow
For the members of the 2025 Taskforce, the income gap with Australia and the size of the Kiwi diaspora are evidence of calamitous policy failure.
Their prescriptions for what to do about it are rooted in 1980s thinking: slash taxes and what people can expect from the state, deregulate and privatise.
The risk, of course, is that instead of stemming the outflow of migrants they make Australia look more attractive to more people by comparison.
If you are going to prescribe a course of radiation and chemotherapy to shrink the state, you need to be very sure of your diagnosis.
A quite different one is offered by Professor Philip McCann in his paper "Economic geography, globalisation and New Zealand's productivity paradox" (New Zealand Economic Papers, December 2009).
He argues that New Zealand's mediocre productivity and therefore income cannot be explained by our institutional arrangements, which are on the whole pretty good, but rather by that fact that economic geography and history are against us.
Taskforce members' view of the world may not have changed much since the 1980s, but the world has, profoundly, and not always in a good way from a New Zealand point of view. China has abandoned communism, India has abandoned autarky and the Soviet empire has collapsed.
These epoch-making events have hugely increased the effective size of the world economy.
At the same time, new transport and communication technologies, and trade liberalisation, have slashed "spatial transactions costs" or the cost of doing business with people far away.
That ought be be good for a geographically remote country, right? Only up to a point.
Distance (or more accurately, high spatial transactions costs) can provide a degree of protection for small-scale producers and well-paid workers.
In any case, reports of the death of distance are, as Mark Twain almost said, exaggerated. Face-to-face contact matters, even in the age of email and video-teleconferences.
What lower spatial transactions costs do is increase the relative potency of "agglomeration effects", or the economic benefits of gathering together in cities, with their greater scale and diversity.
McCann says transport costs have fallen by 95 per cent over the past century, and telecommunications costs by a similar amount in the past 35 years.
This has encouraged the geographical dispersion of activities which are not particularly knowledge-intensive and do not add a lot of value, but can be standardised and reduced to a routine.
By contrast, spatial transactions costs have become more important for knowledge-intensive, high value-added activities because of the premium attached to face-to-face contact.
"It is no accident that sectors that use information and communications technologies most intensively ... are among the most spatially concentrated, clustering in places like Silicon Valley, Wall St and the City of London."
The evidence is overwhelming that economic growth and globalisation over the past 20 years have favoured larger urban centres in almost every country, McCann says.
Cities nowadays are where the highest levels of productivity, innovation and entrepreneurship are to be found. The consequence, around the world, is a widening income gap between urban hubs (like Sydney) and their peripheries (like New Zealand).
In our case, there is no offsetting fiscal flow from rich hub to poor hinterland as in large entities like the United States or European Union.
Short of going cap-in-hand to the Australians and saying we have had second thoughts about federation, if they don't mind, there is not much we can do about that.
As the Closer Economic Relations pact has reduced barriers to the movement of goods, capital and people between the two economies, the greater industrial diversity of Australia's larger cities has provided greater employment opportunities and a greater variety of input and output linkages for mobile firms, McCann says.
It makes Australia a more attractive destination for multinationals to invest in, increasing the amount of capital per worker and with it productivity and incomes.
This is an explanation of the transtasman income gap that has nothing to do with tax rates, labour market regulation or the absence of a funder-provider split in health and education.
To be fair, McCann is not arguing that policy is impotent. He sees scope to reduce the toll taken on the economy by dominant players in such key infrastructure as air transport and telecommunications.
He also acknowledges the consolations of living in smaller centres, that housing dollars stretch further, commutes can be shorter and amenities like beaches are more accessible and less crowded.
Nonetheless, his central thesis is liable to leave people feeling fatalistic.
But the world is allowed to have more than one trend at work at a time. In other respects, geography is kind to us and big historic trends are running in our favour.
New Zealand's combination of ample rainfall, temperate climate and skilled farmers ought to count for more over coming decades than over the past few decades, as the world's population climbs and large numbers of people move into the income brackets where they can afford the foods of affluence.
There is already some evidence that we have passed a big secular turning point in terms of trade - the relative value of the kind of thing we export as against the kind of thing we import.
Meanwhile, what is happening in Copenhagen right now suggests that being well-endowed per capita with renewable energy sources will be an increasingly good position to be in as the century progresses.
In the meantime, as the New Zealand Institute's latest report reminds us, the economy needs another pillar of growth. It is to be found in lifting our game when it comes to innovation in general, and the commercialisation of scientific discoveries in particular.
In that context, being small and remote doesn't help, but it would be less of a hindrance, the institute's director Rick Boven argues, if scientific research was better funded, less fragmented and more commercially focused.
But even more than that, what is missing is the combination of expertise and risk capital needed to convert breakthroughs into global businesses.
He quotes the observation of someone working in a university's commercialisation unit: that at prestigious US universities there would be 10 entrepreneurs clamouring for the chance to exploit every potential commercial opportunity the researchers generate. Here he has to "beg" entrepreneurs to take on promising ideas.
