By David Cunliffe
The Government's launch today of its new economic development policy marks a turning point in New Zealand's economic debate and management.
Unveiling a crucial part of the platform for the election, Prime Minister Jenny Shipley and her National Party colleagues will be acknowledging - implicitly or explicitly - that the Government can play a role in stimulating economic development, rather than leaving the job entirely to market mechanisms.
National is a latecomer to this view. Labour and the Alliance have long embraced it and have already published their policies. But how should the three parties' proposals be judged in an international context?
To compare countries' policies, Robert Wade, a New Zealand economist at the World Bank, uses a three-way classification in his book Governing the Market.
The most hands-off are free-market measures designed to let the markets run, usually by easing regulation and lowering input costs. This has been the dominant model in New Zealand for at least the last decade but there has been growing concern about the model's ability to stimulate economic development.
Cutting costs, restructuring the economy and reducing the Government's role is the free-market prescription for improving New Zealand's trade performance and to shifting the economy to value-added activities. But our poor trade effort shows this has not worked well enough.
What are the alternatives? We have heard much about the success of activist Government policy in Finland and Ireland. Yet, their approach is different to that of Singapore or France. What would work best for us?
Mr Wade divides the activist approaches into two kinds: simulated market and governed market.
Simulated market policies seek to correct failures in markets and to harness their benefits through:
* Strong competition law to promote vigorous domestic competition.
* Access to venture capital where private funds are scarce or too risk-averse.
* Research and development policies aimed at stimulating private investment.
* Skills and education policies designed to improve links between training providers and job markets.
* Export finance guarantees to stimulate trade.
* Sector and cluster strategies designed to remove roadblocks and to stimulate the benefits of allied industries locating near each other.
In contrast, governed market policies go further, replacing markets with publicly owned solutions in situations where market failure is pervasive or where public goods exist (typical in health, education and welfare). Examples include:
* Direct subsidies to individual firms, such as export development grants.
* Direct provision of state-owned research and development.
* Deterministic sector planning based on output targets and timetables.
* Nationalisation of firms and industries (such as by France in 1982).
So how far should New Zealand go in its move to a more activist approach? How do the major political parties stack up? Who is doing what abroad?
The approach of several OECD countries surveyed features prominently in the current debate, with New Zealand rated by its present policies rather than those proposed by the three parties.
Two observations emerge. First, most of the industrial countries surveyed used a wide range of tools.
All used the key simulated market tools as well as the free-market basics. Getting economic fundamentals right was not at odds with stimulating growth or adjustment.
New Zealand is an oddity with its very restricted set of tools.
Governed market tools have been selectively used by the more aggressive countries. Singapore and Ireland have successfully used sector planning, extensive infrastructure development and vigorous competition for foreign investment.
France (like Sweden) had a heavy state investment in ownership of industry but has had to retrench due to poor performance and fiscal constraints.
There appears to be some correlation between a more aggressive industry development policy and higher growth rates, although over-using Government market tools appears to have its downsides.
Much more analysis is required before causal links can be proved.
The hypothesis emerging from this quick survey is reasonably clear: New Zealand cannot afford to stop at getting the basics right. Simulated market tools are widely successful and should be our stock-in-trade, too.
Governed market tools can be used carefully and selectively, but their results are mixed and they are harder to get right, especially in a global economy with mobile capital.
National has already foreshadowed that its package today will include:
* Improving access to venture capital by focusing on private-sector lending rules.
* Refocusing Government research and development spending on high-tech industries (currently 55 per cent goes to commodity agriculture).
* More regulatory reform to remove barriers to business innovation.
* Education policies, including scholarships and university-based centres of excellence, to increase the skill base of the workforce.
* Bringing together industry leaders to examine strategic investments.
* Actively promoting success and building a supportive culture.
In an international context, National's approach is essentially still based on free-market policies, with some limited simulated-market elements. Its focus is both on value elements (technology, training) and cost aspects (further regulatory reform).
Labour's industry development package targets information-based, high-value exports and jobs. Its approach is drawn from the simulated-market school, with some scope to expand governed-market elements such as research and development grants and export assistance.
It includes:
* A strategic development agency, Industry New Zealand, working with Trade New Zealand and Technology New Zealand to provide a one-stop shop of industry assistance at cluster level.
* Enterprise financing, including development and venture capital, pooled with the private sector, and networks of business mentors.
* More effort to attract productive foreign direct investment to New Zealand.
* An accelerated depreciation regime for research and development, state assistance for patent protection, boosted science and technology training and technology strategies.
* Export finance guarantees and development funding in partnership with the private sector.
* Local economic development initiatives, including decentralising the public sector.
* Workplace productivity and ecological sustainability initiatives designed to enhance the quality of New Zealand products and services.
Labour also plans to strengthen competition law and sharemarket supervision to ensure the integrity and competitiveness of local markets.
So how far should New Zealand go? Neither National nor Labour's policies are radical by international comparison.
Labour's policy puts it towards the middle of simulated-market approaches; National's mix of free and simulated markets places it towards the free-market end of the field.
Labour is aware that arguments can be made for more aggressive stimulation of key export sectors and investment needs. However, there are several constraints that must be worked through.
First, using heavy intervention governed-market tools is risky. Policies must be carefully analysed to avoid the lags and traps that would result in a waste of taxpayers' money on "corporate welfare."
Second, tools need to be tailored to New Zealand's unique situation. The benefits of each intervention must be demonstrated to outweigh the costs. The most important things must be done first to get value from your tax dollar.
New Zealand must work towards its own answers based on careful analysis of our long-term competitive and comparative advantage.
Michael Porter, the Harvard expert on economic development, made a good start in 1991 but his report has gathered dust since.
It is now time for an updated and better-supported strategic review that takes full account of the dynamism of the global economy.
* David Cunliffe is a business and economics consultant with Boston Consulting Group and the Labour Party candidate for Titirangi.
Getting basics right key to sparking economic growth
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