Andrew Gawith: Small steps to bridge a big gap

After a coalition agreement, a job summit and several taskforces we have finally been clued into the Government's plan to catch Australia.

Like previous plans, it shows the Government is concerned about important stuff, like investment and jobs. But how much can we depend on the Government to do much about jobs, or indeed economic growth?

Bill Clinton used the quip "it's the economy stupid" in his 1992 United States election campaign. It's hardly surprising that John Key feels obliged to talk about the economy. But the idea of catching up with Australia will eventually be filed away alongside Helen Clark's goal of lifting New Zealand into the top half of the OECD.

There are two major problems that this (or indeed, any) government faces in achieving its growth agenda. The first is that it is businesses, not governments, that generate jobs, profits and economic growth. Businesses grow because there is demand for their product.

Governments put the basics in place for the economy to function - infrastructure, laws, a healthy and educated workforce. But these don't earn us foreign exchange.

The second major problem is that we are small, and a long way away from our markets. In a fast moving world where access to information and relationships are important, this is a real disadvantage.

It makes life particularly difficult for anyone wanting to expand their business by exporting to distant markets. Businesses here have to learn to export sooner than their counterparts in Australia, because the domestic market is small, and they then have to get bigger very quickly to fulfil orders in big overseas markets.

Size has other advantages - it is easier to hire smart people, and all those smart people can bounce ideas off each other, too.

The Government's approach is to get out of the way of people and businesses by reducing tax and regulation, and hope people's desire for success will motivate them to work harder and/or smarter. This strategy will probably help, but is unlikely to be sufficient to catapult us towards Australia's average incomes. To make a discernible difference to our relative economic prospects the tax and regulatory environment would need to be convincingly superior to that in other countries. Taxes may not need to be lower, but the tax system needs to be efficient, fair, comprehensive and easy to administer and comply with.

So what else should we being doing? There are as many theories as there are economists, and little consensus to go around. Some ideas have been tried more than once. For instance, we have been trying to shrug off our dependence on commodities for at least 30 years but we are still almost as reliant on them for our export earnings as we ever were.

Rather than look for king-hit solutions or game-breaking ideas perhaps the answer lies in a host of small steps and tweaks across a wide range of activities that could steadily lift our performance.

A good example of this incremental but ultimately effective approach to performance was New Zealand's successful challenge for the America's Cup in 1995 and the equally successful defence of it in 2000. They adopted a team approach - where everyone was expected to contribute to better results rather than relying on those at the top to have all the answers. Team New Zealand sought out appropriate technology and adapted and improved existing technology to lift their game. And they were tenacious about pursuing small improvements - they eked out gains rather than looking for step changes in performance.

We might be an uncomfortable distance behind where we'd like to be but policy lurches, constant re-structuring of public services and the pursuit of pet projects are not the best way of catching up with countries whose incomes we aspire to or envy.

The problem seems to be that too many of the solutions are driven from the top and employees are expected to deliver according to the plan.

There's no ownership further down organisations and therefore commitment to change fades - and in some cases resistance sets in.

Better to involve as many people as possible in searching for the small changes that accumulate into real progress. Economic growth may be a macro concept but it is driven by small decisions made by a wide range of players in the economy from individual entrepreneurs and households, to boards of directors, regulators and researchers. How individuals allocate their time and skills, what they do with the income they earn, and where they invest their savings are very important decisions in determining future growth.

* Andrew Gawith is a director of Gareth Morgan Investments.