Pattrick Smellie: Making NZ rich: Are we doomed to choose?

Forestry Minister Shane Jones. Photo / Getty Images

COMMENT:

Forest owners have spent much of the last couple of weeks melting down about the sudden appearance of Forestry Minister Shane Jones's guerilla policy to impose a licencing system on the sector.

He wants to use it to secure timber for domestic manufacturing. They say he doesn't understand how the sector works.

Introduced as Budget legislation for immediate passage, the Forests (Regulation of Log Traders and Forestry Advisers) Amendment Bill is about as far from urgent legislation as it's possible to imagine.

Most urgent Budget legislation has some immediate impact – a tax change, a new levy, a higher rate of excise on petrol, booze or smokes.

The only justification for this legislation getting the fast track is that Jones is an impatient minister who has tired of being thwarted on various big ideas to create employment and value-added industries in regional New Zealand generally and his electoral rohe of Northland, in particular.

Hence, there have been just two days of select committee submissions.

Big corporate forest owners worry that Jones will be all too happy to use them as targets for populist electioneering as he's done in the past with Air New Zealand, Fonterra and others.

However, one substantial forest owner, Ernslaw One, has been blunt enough to say it will down tools on some upcoming developments if the legislation goes ahead, which clearly isn't much help to domestic or any other type of log supply.

The stoush highlights a conundrum of policy-making.

The status quo tends to prevail and politicians who want to effect major change tend to run straight into powerful vested interests whose objections may or may not be well-founded. The point is that they are very hard to knock over.

So Jones has gone for a surprise move to try and get his vision over the line before the election.

However, there is another way this could be approached, suggested in a paper published this week by the Productivity Commission. Written by Singapore-based expatriate economist David Skilling, it looks at the characteristics of wealthy, small, advanced economies.

Skilling recounts yet again New Zealand's depressingly weak record for productivity growth, rammed home by the fact that of the 13 such economies in his comparison group, New Zealand is the poorest, producing gross domestic product of US$40,634 ($65,510) per head of population.

Our next nearest comparator is Israel, where GDP per head came in at US42,823, using figures produced in last month's IMF World Economic Outlook, based on 2019 statistics.

The wealthiest small, advanced economy is Switzerland, a tax haven and bastion of banking secrecy, so perhaps we shouldn't feel too badly that we are so far behind their US$83,717 GDP per head. However, it does smart a little to discover that the average Irish citizen produces wealth of US$77,771 annually – close to twice what a Kiwi cranks out despite living in a pretty similar-looking economy.

In Australia, which is not counted as a small but is an advanced economy, the figure is US$53,825. The US is at US$65,112 per head.

Among the characteristics of the most successful of the small advanced economies, says Skilling, are strategic government research and development and educational investment in sectors chosen for their competitive advantage.

"This should not be characterised as 'picking winners'," he argues. "Rather, it is a structured approach to strategic prioritisation of policy of and resource investment."

A pedant might say that does sound a helluva a lot like picking winners.

But anyway, Skilling says the sectors available to any one country are always limited by that country's particular circumstances. As a result, "small economies are 'doomed to choose' if they are to be successful."

There is risk in the mantra that the government should set a level playing field and let those on the field decide the game.

Instead of letting a thousand flowers bloom, a small country risks "a thousand dead flowers because firms do not have the topsoil," says Skilling, who also demonstrates another risk of this approach: a pretty appalling mixed metaphor.

However, the point is that "too much diversification increases the risk of an absence of economic dynamism and resilience."

In New Zealand's case, there have been plenty of government investment initiatives into various targeted industries from forestry to film-making, but they have all tended to suffer from a "sub-therapeutic dose", argues Skilling.

Jones wants to encourage wood processing, so fewer raw logs are exported. Photo / Mark Mitchell

The answer, he suggests, is "an explicit materiality focus in terms of desired outcomes", which is probably what economists say when they mean "make it big enough to matter and therefore most likely succeed."

"An objective of transforming large parts of the primary sector, or developing the weightless economy such that multiple Xero-type companies grow into international markets, requires structural policy interventions rather than cluster-based policy that is focused around small, local clusters" – which is one of the mistakes he says New Zealand has kept making.

Where the paper gets interesting is that Skilling identifies where the loot to make this happen could come from.

"The resourcing allocated to the Provincial Growth Fund or parts of the unallocated Covid-19 Response and Recovery Fund" – around $20 billion – "is a more appropriate scale for this type of policy than much existing enterprise policy," he says.

Not only is that money theoretically available, but such thinking is already gestating rapidly in pockets of New Zealand's government research sector and various private entrepreneurs.

Funnily enough, such an opportunity is in the target of the latest forestry legislation: the wood-processing sector.

NZ Bio-Forestry has been researching opportunities intensively over the last four years, putting together a consortium of Taiwanese, Singaporean and New Zealand interests with access to a combination of technology, capital, and wood fibre.

It would make chemicals, bio-degradable plastics, extracts used in industrial processes and massively increase the return on every tree currently harvested in New Zealand.

This is far more ambitious than using New Zealand logs to make furniture or building products.

It's also unlike the blunderbuss attempt to regulate an unwilling industry into supplying local lumber without a clear value-adding plan.

An approach like this comes with a degree of strategic intent and executable thinking that could transform the wood sector in the same way as Iceland has transformed its fishing sector by extracting value from every bit of the fish.

Of course, this might not be the right plan for New Zealand's forestry resource. But there are others very like it on the drawing board. At the very least, it is in synch with what Skilling has identified as the secret to small, advanced economies becoming far wealthier than we are.