Dialogue: Investment in skill vital for a healthy economy

By PETER CONWAY*

Workers have a vital interest in economic development. That is one of the reasons the Council of Trade Unions has for many years argued for a high-wage, high-skill economy.

We know this is not easy to create. We are a small vulnerable economy. Yet we also have a wonderful country with excellent resources. So the CTU has been willing to engage with the Government, business and the wider community on how to build a sustainable, quality economy.

Union cooperation with industry policy will be important. Industry training initiatives, speeding up the innovation process, enhancing labour productivity, improving the depth and quality of social capital, transitional processes as industry composition changes, and a balanced focus on job growth alongside higher wages rewarding enhanced skill, will all rely to some extent on union cooperation and initiative.

Unions welcome the change of focus away from a policy agenda based entirely on eliminating and reducing cost (including wages) to a set of policies based more on innovation and investment. The CTU supports an investment culture - investment in the physical, social and skills infrastructure.

We also welcome signs of a broader political consensus around the role of the state in economic development. Of course, there will be debates about the extent and the means of delivery. There will also be debate about the ways in which we invest in greater knowledge. Unions see the knowledge economy as part of the knowledge society, not the other way round. There has to be a public dimension, otherwise knowledge, as an infinitely renewable resource, will be increasingly captured by narrow commercial interests.

The knowledge economy is not just about nerds in front of computer screens but arises from a recognition that economic advantage can be created through innovation rather than relying on existing comparative advantage. Knowledge also extends the capacity of the resource endowment - physical and human. It is getting extra employment, production and income from the forests, fisheries, farms and factories, not just processing information, faster. And it is creating opportunities that lead to new enterprises and, in some cases, new industries.

The problems in the economy are glaringly obvious. We appear to have suffered a deterioration in the culture of making things. The managers of modern business in many cases possess greater skills in cost control and mergers and acquisitions than in technical management and innovation. Public relations and marketing gloss have replaced genuine product development.

We appear to have been entranced by the finance sector. Morning, noon and night we are updated on the markets. At the risk of gross oversimplification, this is indicative of the switch away from a focus on productive, long-term investment for growth and a move towards what some have described as a casino economy.

At the end of the free-market experiment, we are saddled with a huge current account deficit, mainly because of the investment income deficit.

Private debt is running at more than 100 per cent of gross domestic product. Household debt to annual income is also about 100 per cent.

We have high private debt alongside vast consumption of imports when we need greater savings, investment and exports. There are huge skill shortages emerging, unemployment of more than 6 per cent and low real wages.

So there is a clear need for a change in direction. But it should not become a non-negotiable blueprint as was the post-1984 programme. There has to be an overarching strategy, but the component parts may differ in emphasis along the way.

There are many aspects to such a strategy. Investment in skill is vital. Knowledge is not a scarce resource unless there is no investment in intellectual infrastructure.

Higher funding for education at all levels, appropriate qualifications, and lifelong learning can complement a renewed focus on apprenticeships and industry training.

Another key component is to facilitate research and development. Firms tend to underinvest in R&D because it is hard to capture all the spin-off benefits. The Government cannot take on too much of a fiscal risk but there should be a measured and monitored tax accommodation of R&D spending.

Partnerships between central, local government and other relevant stakeholders are also important. Unions need to be included. That is why the CTU is encouraging local unionists to get involved with their communities to discuss initiatives that can result in new job opportunities.

The CTU also believes that Industry New Zealand needs to facilitate industry strategies and not be confined to regional development initiatives. Such strategies cannot replace commercial considerations or market signals, but ensure that the investment in infrastructure and skills can mean that we maximise the jobs that can emerge from, say, wood processing.

Other features of an economic development strategy include provision of venture capital; advice and assistance to SME management; export credit guarantees; encouragement of clusters; a review of Government procurement policies; support for incubators; and consideration of compliance costs for small businesses.

Such an approach inevitably involves risk and is subject to constraints. Government help to industry is susceptible to the phenomenon by which a business, intent in any case on proceeding with an initiative, happily picks up a Government subsidy or some aid along the way because it was there.

Constraints include the memory of Think Big, the extent of foreign ownership of business such that value is extracted from New Zealand at a faster rate than it is added, privatisation of key assets and the level of spending that can realistically be devoted to such policy. There is a good argument for a quantum leap in economic development expenditure, but such notions have to compete with superannuation pre-funding as well as the spending pressures because of the huge social deficit that has developed over the past two decades.

Economic development policy cannot stand in isolation from education, science, industry training and tourism. All policies have to be pulling in the same direction. Macroeconomic settings crucially affect trade and industry development. A significant change in the value of the dollar (leaving aside the current slide) or a sudden rise in interest rates could undermine the export potential of a business that may have been assisted in some way by an activist industry policy. But this fact is not in itself an argument against such a policy.

Finally, there are significant lags in the returns for economic development expenditure. Early dividends in terms of new jobs, new firms, and stronger regions will occur in some cases. But in general this is a long road. It is the direction of policy that is important.

* Peter Conway is a Council of Trade Unions economist.