Catching up on living standards is a tall order

This week's Knowledge Wave forum was awash in ideas for boosting our living standards but, reports SIMON COLLINS, any solutions must be even-handed.

These days it is hard to find a New Zealand family that do not have at least some of their adult members living in Australia. We have all heard of parents who struggled for years to keep their children's heads just above water here, who have gone to Australia or beyond and say they now have money in the bank.

Our companies are going, too: Brierley to Singapore; Lion Nathan, Baycorp and others across the Tasman.

Are we, asked Reserve Bank Governor Alan Bollard on Thursday, simply "a weak country"?

Ripping off his jacket and tie at the Knowledge Wave Trust's leadership forum to reveal a Team New Zealand shirt, Bollard showed three slides to ram home the point:

* "The OECD Regatta 1975" - a clutch of national boats on the Hauraki Gulf all with incomes of between US$14,000 and US$17,000 a head. New Zealand's rank: ninth.

* "The OECD Regatta 1985". NZ rank: 18th.

* "The OECD Regatta 1995". NZ rank: 20th, still sitting on US$17,000, while all the other countries shown on the earlier slides have passed us, most so far in advance that they are now off the picture to the right.

The OECD, the Paris-based Organisation for Economic Co-operation and Development, now has 30 members, including recent additions such as Poland and Mexico. But among the 24 countries that belonged in 1975, we are now poorer than all except Spain, Portugal, Greece and Turkey.

"Does it matter?" Bollard asked. And he answered: "Well, yes, because we know that people can leave and they do."

So the scene was set again. Race two of a gruelling home challenge about how we can lift our living standards and get back into the world's top ranks. Race one, back in August 2001, was a most unusual event: a conference of national leaders to discuss a critical national issue, with top-level government participation, but called by a university with business sponsors and predominantly business involvement.

Auckland University Vice-Chancellor John Hood, a former executive for the Fletcher group that once owned the Tasman pulp mill, was perhaps the only person who could have done it.

He shifted attitudes in New Zealand's bigger businesses, transforming them from frustrated onlookers to active participants in a collective effort to lift the country's performance.

The Prime Minister, Helen Clark, listened politely. But in the end, she made the whole exercise seem pointless by saying in a final press conference that the event would not change any of her policies.

As of course it could not, by itself, because a gathering mainly of big business leaders cannot have any democratic legitimacy.

Yet Hood and his Knowledge Wave Trust persisted. This week they tried a second "forum", this time with a broader invitation list including 100 "emerging leaders".

Hood reasserted the goal in his opening speech: to return to the top half of the OECD rankings in economic output a head by 2011.

It's a tall order. Treasury economists calculated in 2001 that even to catch up to the average of the present 30-member OECD by 2011, if all countries kept growing at the same rates as in the 1990s, would require more than doubling New Zealand's trend growth in output a head from 1.7 per cent a year to 3.6 per cent.

In fact, we have started well. In the year to last September, output grew by 3.9 per cent and population by only 1.4 per cent, so our output a head grew by a respectable 2.5 per cent.

More dramatically, each kiwi dollar on Thursday was worth 14 per cent more in Australian dollars and a huge 28 per cent more in US dollars than it was at the time of the first Knowledge Wave.

That rise alone has halved the 28 per cent gap that existed in 2001 between incomes a head on either side of the Tasman.

The trouble is that no one expects it to last. Last year's growth was driven by dairy farmers enjoying record prices and by a surge in immigrants. This year, partly because of the high exchange rate, Fonterra is cutting its payout by 32 per cent. Immigration is slowing.

Moreover, the high dollar is sucking in more imports and squeezing exports, suggesting that the current exchange rate may not be sustainable.

Understandably, Helen Clark pointedly refused to endorse any specific target date for catching up with the OECD average. It was, she said on Wednesday, only "a feasible goal over time".

For decades now, at least since Britain joined the European Union 30 years ago, almost everyone who has thought about the New Zealand economy has realised that we cannot count on remaining a rich country unless we broaden our base beyond primary commodities.

But we have made very little progress. Food, wood products and minerals still accounted for 51 per cent of our total earnings from exports, services and investments in 2000, down only slightly from 59 per cent in 1975.

This week's forum was a kind of collective brainstorming about how to do better.

Stanford University economist Paul Romer said growth depended on setting good "road rules" for the market, keeping prices stable and then creating a well-educated workforce, especially people trained in science and technology.

With only 5.5 per cent of 24-year-olds having science or technology degrees, New Zealand lagged well behind most European and advanced Asian countries. We should, said Romer, prioritise education spending in those fields.

Harvard's Juan Enriquez-Cabot stressed the need to be literate in the new "language" of genetics that will be at the centre of advances that will change our lives in this century.

In the long run, and for the world, this makes sense. Most of the things that have made a real difference to our living standards in the past few hundred years, from modern medicine to the internet, have been created by scientists and technologists.

In New Zealand right now, however, Auckland University education professor John Hattie said graduates in science and maths were among the highest in the ranks of unemployed university graduates. Boosting their numbers might simply drive more of them overseas.

Professor Richard Florida, an expert on regional development at Pittsburgh's Carnegie-Mellon University, offered a broader answer.

Yes, of course, he said, technology was the key. But the world's most successful technology cluster, Silicon Valley, took off because creative people like the long-haired founders of Apple Computers, Steve Jobs and Steve Wozniak, wanted to live in the excitingly diverse environment of the San Francisco Bay.

Creative people might be artists or rock musicians on their way to becoming entrepreneurs. They wanted to be around other creative people. So regions should foster "the three 'Ts of economic growth: technology, talent, tolerance".

Other ideas were more familiar. A common refrain from speakers such as The Economist editor Bill Emmott or entrepreneur Hamish Conway was that the Government could help businesses grow by cutting compliance costs in areas such as planning consents and accident compensation, and cutting taxes.

"You need to maintain the pace of flexibility of labour markets, and of relatively limited government, that was set by the Douglas and Richardson reforms of the 1980s and early 1990s because other countries are also reforming and improving their competitive position," said Emmott.

Romer agreed. Each nation faced a "market test" that limited the extent to which it could extract taxes from the successful to look after the less fortunate.

"Those [successful] people will make decisions about where they can find the best opportunities for them to achieve some ambition that motivates them, and to live in a society that exhibits a concern for others and avoids the extremes of inequality," he said.

"We must do this in a way that ultimately makes a society more competitive, more attractive to the world. If we do things that cost a lot in efficiency and only give a little bit in equality, we'll lose that competition to be the most attractive place in the world to live."

There was much talk of Ireland, which has "bought" jobs by offering huge tax breaks and subsidies to foreign investors.

Saatchi & Saatchi global chief executive Kevin Roberts said the Government should find the "erogenous zones" in tax policy that would attract investors, and target tax breaks to them.

He and others urged more spending on marketing the country, not just to tourists but to potential export customers, investors and migrants.

"As a country we spend 0.1 per cent of gross domestic product on advertising New Zealand internationally, mostly in a 'come visit' context," he said. "This is a ridiculously low sum if we're serious about growth. We're spending more money to build the new Northland prison."

There was a lot of talk, too, about attitudes - about celebrating success, "growing up" from our colonial cringe and taking on the world.

"One of the big issues we have missed over the last decade is nothing to do with the Government, it's all to do with business leadership," said Chris Liddell, recently shifted from Carter Holt Harvey to the Connecticut head office of its owner, International Paper. "I don't think we have had a solid core of business leaders who have been interested in investing and competing globally rather than cutting costs and focusing on the domestic market."

Beyond the conference podium, other ideas flourish. Wellington economist Brian Easton, a leading critic of former Finance Ministers Roger Douglas and Ruth Richardson, noted that New Zealand's output a head started falling below the OECD average only in 1985, the year after Douglas took office.

What went wrong then was that Douglas let high interest rates drag up the kiwi dollar, choking off manufactured exports. Output a head stopped growing until the early 1990s, since when it has grown again in line with the OECD average.

In Easton's view, the halt from 1985 until 1992 was self-induced and unnecessary. To a lesser extent, the current high exchange rate may be repeating the mistake.

In the two countries that have grown fastest in the past 40 years, Singapore and South Korea, governments have been much more hands-on. They have not only kept exchange rates competitive, but also "picked winners" and backed them with appropriate education and training priorities, research institutes and bank finance.

In her speech, Helen Clark stressed her milder version of this approach: seven new centres of research excellence at universities, six public/private research consortiums, 15 incubators, five new venture investment funds, 26 regional development plans, six industry taskforces and more.

Her Government has chosen a path that explicitly rules out some, but by no means all, of the Knowledge Wave's ideas. Big tax cuts and "smaller government" along Douglas/Richardson lines are out.

"If the agenda for growth is based on slashing taxes and spending, then we would not only face an uphill task financing the acquisition of knowledge and skills, but would also face resistance from a disempowered and dispirited community," she said.

But she clearly recognises a need to keep looking for ways to broaden the economy and boost our living standards.

"The art of governing in this respect surely rests on the balance struck between head and heart," she said.

"Too much head in the form of economic rationalism can crush the spirit of the community. Too much heart can break the bank."

Paul Romer could not have said it better.

Herald Special Report - February 18, 2003: