Benefits of the helping hand

By SIMON COLLINS

What if National, and not Labour, had been running New Zealand's economic policy for the past 3 1/2 years?

Tax rates on top income earners and companies would be lower - on their way down to 25c in the dollar over 10 years.

Welfare would be tighter. National would have kept the work tests for sole parents and sickness beneficiaries that it introduced in the 1990s.

If Dr Don Brash had become its finance minister last year, the unemployed might be queuing at post offices in the mornings to work for their dole.

Unions would still be dwindling. The minimum wage, frozen at $7 an hour for almost three years by the 1999 election, might still be stuck there.

And despite the late 1999 Bright Future package, which increased research spending and unveiled plans for business "incubators", the job of innovation and growth would still be largely left to business.

How would the economy be doing today? Although we cannot know for sure, the answer to that question must be the starting point to assessing what difference Helen Clark's much-trumpeted "growth and innovation strategy" has made.

The world economy suggests that under National or Labour, New Zealand would have enjoyed the boom in commodity prices that persisted for a year after the US Nasdaq index toppled in March-April 2000.

Under either party, there would also have been a perverse boost from immigration as New Zealanders laid off when the US bubble burst swarmed back home and as newly-prosperous Chinese families began sending their children to be educated in any English-speaking country that would take them.

Would National have built on those foundations by attracting investment with its tax cuts, low wages and free-market allure?

Labour has not been willing to leave it to chance. Since 1999, it has spurned the hands-off policies of the previous 15 years.

In place of tax cuts, Labour lifted the top tax rate to 39c to pay for more health care and education, and raised the minimum wage to $8.50 an hour.

In the past three financial years, it has raised research spending by 17 per cent to $485.8 million and spending on industry training and apprenticeships by 39 per cent to $188.8 million.

Most spectacularly, support for business and regional development jumped from $14.2 million to $100.5 million.

In the year to last June, Industry NZ handed out $7 million to 89 companies to help "significant expansion", did business appraisals for 252 firms and helped 38 of them raise capital.

It gave $1.5 million in total to 15 business incubators and brought together 22 "clusters" ranging from organics to software.

It put $10.4 million into regional strategies, including $2 million each for four big projects - a technology park at Hamilton, forestry training in Rotorua, food processing research in Napier and wine research in Marlborough.

It gave a $500,000 "guarantee of assistance" to the American company Jack Links to build a meat snack factory in Mangere, another $500,000 to US company Media Lab for a research centre in Wellington and $50,000 to Hit Lab, a joint venture between Washington and Canterbury Universities.

Trade NZ's investment arm helped expatriate yacht-builder Allen Jones set up in Whangarei, and this year gave $1.5 million to computer giant EDS to install call centres and researchers in Auckland and Wellington.

Less successfully, Industry NZ and Technology NZ promised $1.6 million to the Ericsson-Synergy software joint venture which closed late last year, and helped Sovereign Yachts to get land at Hobsonville, only to see it lay off staff last February.

Last year's Budget also provided $100 million for new venture investment funds with private sector partners.



In its growth and innovation strategy, the Government promised "disproportionate effort" for three budding industries - biotechnology, information and communication technologies (ICT), and creative industries, including film-making and design.

Taskforces for ICT and biotech have recommended more research funding and tertiary education in their areas, which the Government is likely to approve.



Overall, Industry NZ said, the businesses it supported in the year to last June expected to create 7863 jobs over the next two to five years, adding about 0.4 per cent to the 1.9 million people already in the workforce.

Statistics on research and development issued last week also indicated possible benefits from the new "hand-up" approach.

Reported business R&D grew by 31 per cent between 2000 and last year, driven partly by growth in areas such as biotech and partly by a policy change which let companies claim their R&D costs as tax-deductible.

However, it is much harder to say whether the new approach has made any difference to the ultimate goal of higher living standards.

New Zealand's income per person grew at a healthy rate of 2.8 per cent a year in the three years up to last December, slightly above the average of the 30-nation Organisation for Economic Cooperation and Development.

Taking an 11-year average to smooth out short-term gyrations, the Treasury graph on this page shows New Zealand's growth rate dramatically rejoining the OECD pack after sagging well below most countries for more than 30 years.

But this improvement has many causes. Apart from high commodity prices, it is impossible to disentangle the effects of the two conflicting policy shifts, the deregulation of the 1980s and early 90s and the relatively "hands-on" approach since 1999.

Left-wing economist Brian Easton believes the big plunge below the OECD pack was caused by the 1980s reforms, chiefly by letting the dollar rocket upwards at a time of high inflation and as local producers lost their protection against imports.

Output stagnated and unemployment peaked at 11.6 per cent in 1991.

But in a report for the Business Roundtable, Australian economist Wolfgang Kasper said 85 per cent of the gap between rich and poor countries could be explained by differences in economic and political freedom, including Government spending and taxes.

In his view, the energy unleashed by tax cuts and deregulation 15 years ago is still fuelling New Zealand's growth. He cites the Treasury's forecast of annual growth per person slowing to around 2 per cent in the next few years as that effect wears off.

Certainly it is hard to see evidence of any growth dividend from the new hands-on approach in manufacturing.

Between 1991 and 2000, non-food manufactured exports doubled in volume, growing by an average of 7.8 per cent a year.

In the three years to last December, that growth dropped to 4.3 per cent a year.

Infometrics economist Andrew Gawith, who surveyed 30 manufacturers last year, found that several clothing companies and others had shifted their factories to Asia, leaving only research and design in New Zealand.

But overseas earnings from services other than tourism and transport almost doubled from $1.5 billion in 1999 to $2.6 billion last year, only partly because of last year's low kiwi dollar. A big part of this growth was in software.

"Should we now be putting far more effort in services?" Gawith asks.

It can be argued that this is what the Government is doing with its focus on biotech research, ICT, films and design.

So far, the money involved is small in the context of our $120 billion economy.

Treasury economist David Skilling wrote in 2001 that Industry NZ grants were "not on the same scale" as what was needed to build industries big enough to sustain world-class specialists.

If he is right, all the hands-on interventions may be doing only limited good apart from boosting the morale of those benefiting from it.

But the policies may be doing little harm. And they might yet turn out to be the catalyst that helps New Zealand's businesses to grow not just in the OECD pack, but above it.