By Brian Gaynor
The setting was perfect for National's big economic policy announcement on Wednesday. It was a beautiful winter's day; 10 Government ministers were beamed around the country in a high-tech presentation and large audiences gathered in the four main centres and Palmerston North.
The presentation started on an upbeat note, but a dark shadow hovered behind Enterprise Minister Max Bradford as he outlined the policy details. It was the image of Sir Robert Muldoon.
Mr Bradford tried to step away from its influence but the shadow refused to go away.
After the presentation there was general support for the new announcements, but a widespread feeling that they did not go far enough. Most believe that the Government is now on the right track but it is unable to break away from the policies of Roger Douglas.
Phobias, which grew in reaction to the Muldoon Government, still have a powerful impact on economic policy. These are:
* Governments cannot pick winners.
* Most Government spending is a waste of money.
* Tax incentives do not work.
New Zealand governments have a long history of successfully picking winners. In the early days of the nation, when there was a shortage of business expertise and capital, the Government invested in important industries. These included telecommunications, electricity, railways, banking and insurance.
Forestry, airlines, airports, radio and television followed later.
Six of these former state-owned companies - Telecom, Contact Energy, Air New Zealand, Auckland International Airport, Tranz Rail, and Capital Properties - account for nearly 40 per cent of the sharemarket's current value.
Former Government-owned businesses represent a much higher percentage of our sharemarket's value than in any other western country.
Muldoon's large energy projects have left the public sector with a terrible reputation for its investment abilities. Politicians now refuse even to talk about picking winners, yet the governments of many successful countries, including Finland, Ireland, Singapore and Taiwan, have identified growth industries and encouraged them through the indirect targeting of government spending.
Another lingering reaction to the Muldoon era is the belief that Government spending is a waste of money. Max Bradford reflected this when he told Wednesday's audience: "We are aiming high - but we will not break the bank."
The new economic package involves only $47 million of new spending over four years. Expenditure of $12 million a year is hardly going to create a strong knowledge-based economy.
Government spending has had big paybacks in other countries. For example, the Irish Government spends a huge sum of money through the IDA (formerly known as the Industrial Development Authority) to attract direct foreign investment. In 1998 the IDA received Irish Government grants of $380 million and European Union structural funds of $22 million.
The payback from this is enormous. The companies sponsored by IDA over the past decade or so paid more than $2000 million in income tax last year; employed 116,000 people in high-paying jobs and generated $54 billion of exports for the Irish economy.
New Zealand's total exports in the same period were less than $23 billion.
Significant indirect benefits also arose from this government spending. Many Irish companies are supplying goods and products to overseas-owned enterprises and it has helped created a strong entrepreneurial culture in the country.
How can New Zealand compete with Ireland, and other successful small economies, when the best that Mr Bradford can offer is that overseas investment would be encouraged through "aggressive promotion of New Zealand to overseas investors through targeted conferences and information to key investors"?
No spending projections were announced for this programme. Politicians are reluctant to invest money in our future because they are afraid of repeating Muldoon's mistakes.
Finally, there is a strong aversion to tax incentives in New Zealand because they distort the flat playing field. This is true, but when capital and labour is mobile, companies will leave New Zealand and go to countries which offer tax incentives.
The export tax incentives, which were introduced in the early 1960s for non-traditional industries, were reasonably successful. By the early 1980s the economy had a strong export drive and most of the largest companies listed on the stock exchange were exporters.
Export growth has been dismal in recent years and most of the 10 largest companies in the NZSE-40 Index have no exports whatsoever. These include Contact Energy, Sky Network TV and The Warehouse.
In a perfect world there would be no tax incentives. But as long as other countries offer them, and areas of the economy are not responding to normal free market forces, then they have to be considered.
The general consensus at Wednesday's policy launch was that New Zealand needs to take a few steps back from the extreme end of the free enterprise model. The politicians agree with this but are afraid of being branded with the "Muldoon" tag, even though no one is suggesting we go back to his policies.
Mr Bradford identified specific steps that need to be taken, particularly in the areas of research and development and the stock exchange.
One of his principal aims is for "New Zealand to become a world-class centre for research and development." We are a long way from reaching this goal. Spending on research and development in the 1997-98 year was $1.1 billion, or 1.1 per cent of GDP, compared with an OECD average of 2.2 per cent of GDP.
If New Zealand is to reach the OECD average it needs to spend an extra $1000 million each year on R&D, yet the Government is setting up a new research fund with only $36 million a year.
The most disturbing feature of our R&D statistics is that the business sector, particularly larger companies, is doing very little research and $36 million will not improve the situation.
Why should Fisher & Paykel continue to maintain R&D operations in New Zealand when it can obtain generous tax incentives in Australia?
The Government will put $169,000 into the establishment of a new market for small and medium companies to be run by the stock exchange. This is a step in the right direction but it will not attract a large number of individual investors until the stock exchange rules and its enforcement agency takes a more sympathetic attitude to this group.
A disturbing feature of the policy is that "companies that list on the new capital market can be shell [do not have a product or service] companies established to fund a reputable business individual's future projects."
This proposal will encourage speculative investment, particularly in New Zealand's light-handed regulatory environment. The last thing New Zealand needs is more speculative investment.
This week's policy initiatives were too timid and unadventurous for an economy with burgeoning overseas debt, feeble export growth and a low level of productive investment. The most frustrating aspect is that the politicians have turned in the right direction but do not have the courage or leadership to take the big leap forward.
Shadow hovers over package
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