Macro focus takes oomph out of bang

By Rod Oram

Why aren't New Zealand manufacturers getting a bigger bang out of economic reform?

Because government has focused on the big picture - macro economic policy - but largely ignored the small picture - micro economic policy - judging by the performance of other countries.

A blizzard of macro reforms such as sound monetary and fiscal regimes, an independent central bank and tariff cuts have transformed New Zealand from a closed and inefficient economy to one more adaptable and productive.

But the small picture counts too. Micro economic policies can have a big impact on companies. Moreover, governments can chose to play passive or active roles through micro policies. They can get out of the way by, for example, reducing the cost of regulation. Or they can be active by, for example, helping to promote research and development.

Through 15 years of reform, successive governments have worked on a clear-cut philosophy: governments must reduce their role in the economy. This strategy has meant they have stopped doing harmful things such as running big budget deficits or manipulating interest rates but they have shied away from taking an active role. One of their fears was of repeating the mistakes of the Think Big era of intervention.

In contrast, in a number of fast-growing small countries such as Ireland, Finland, Israel and Denmark, governments have avidly pursued active micro policies. They have actively sought foreign investment, made research and development spending tax deductible and fostered new enterprises through various programmes. Policy management has come a long way since Think Big. Today, governments can carefully monitor their activities to ensure they are producing value for money and no adverse side effects.

"You stopped doing all the bad stuff but you haven't started doing all the good stuff," Professor Michael Porter told an Auckland audience last December. The Harvard professor, an expert on economic competitiveness, is a fan of New Zealand's reforms but says they have not gone far enough.

"New Zealand is in very sound macro economic health but that's not enough.

Wealth is not created by macro policies but by companies. But companies can't get more sophisticated and productive if the micro economic environment constrains them."

New Zealand's macro economy ranks seventh in the world in the competitiveness report by Professor Porter and colleagues. But it ranks 17th on micro economics, pushing us well down the overall rankings.

"Any nation where micro policy is substantially worse than macro goes down," he said. Conversely, a country can be successful by having highly supportive micro policies but less good macro ones.

The National Party Government has been weak on micro policies, both in the passive and active modes. Last year it promoted then abandoned the idea of a Regulatory Responsibility Act as a mechanism for ensuring that the cost of regulation did not exceed its benefit. It remains suspicious of playing an active role.

With Labour proposing the opposite, this year's election should see an interesting duel between the two parties over industrial policies.