Stop the slide - it's time for us to climb

What prospects does New Zealand offer? In a Herald series starting today, SIMON COLLINS and MATHEW DEARNALEY look at how to create jobs.

At the beginning of this year, the head of the Auckland University Business School, Dr Marie Wilson, asked her 800 first-year students how many of them were born overseas.

Two-thirds put up their hands. How many, she asked, expected to be overseas in five years? Eighty per cent put up their hands.

Perhaps they were just going on their "OE" and would come back. So she asked how many thought they would still be overseas in 20 years.

This time they hesitated. "It will depend on how well New Zealand's doing."

"We did feedback at the end of the first half," Dr Wilson says. "One of the things they said was, 'As most of us are not going to be working in New Zealand, it would be good to have more global examples'."

For most New Zealanders, this is a deeply worrying time. After pumping money into the country for much of the past 15 years, suddenly foreign investors are pulling out. The dollar has dropped to its lowest value ever - so low that Prime Minister Helen Clark has suggested we might be better off to give it up and adopt the Australian currency.

As the graph shows, our weakness is chronic. From 1960 until 1984, the income of the average New Zealander slipped from 100 per cent of the average in the world's 23 rich countries to 67 per cent. From 1984 to 1998, we slid to 54 per cent of the rich-country average.

Dr Wilson, an American, says our pay levels for professional people are now even lower.

"Ten years ago, when I came to this country, our salary levels were about 50 per cent of the international levels. Now they're 30 per cent and falling.

"So attracting top talent here is impossible. There are areas of the university that haven't been able to hire anyone except for Third World scholars for five to seven years - in business, information technology, high-technology engineering and medicine."

It is not much better on the factory floor. South Auckland manufacturer Astron Plastics lost three people off its production line a few weeks ago, all going to Australia.

Its chief executive, David Chaston, who divides his time between the company's Auckland and Australian plants, says a worker on the average wage in Australia is now just over $10,000 a year better off after tax than a worker on the average wage here.

The result is a shortage of skilled workers. The Ark, a computer recycling warehouse in Mt Wellington, cannot get enough technicians to repair old computers. Clariant, which makes colouring materials for the plastics industry, cannot find machine operators for its Albany plant.

Yet 188,000 people are living on unemployment or sickness benefits, a figure that almost doubles to 366,000 if we include people on the domestic purposes, invalids and transitional retirement benefits. That's 15 per cent of New Zealanders aged 15 to 64.

Of these, 187,300 are officially "jobless" in the sense that they are either actively seeking or available for work.

And 114,300 (6.1 per cent of the available workforce) are actively looking for work and available, so are counted as "unemployed."

For those who want to work and cannot, this is a tragedy. Financially, it means things such as not being able to afford new clothes when the childfren grow out of their school uniforms, and not being able to keep in touch with other people.

In the Opotiki district, where almost half the working-age population are on benefits, 30 per cent of homes do not have telephones.

Spiritually, dependence on the state and repeated rejection by potential employers makes even the strongest person feel worthless.

And economically, it is an enormous waste. If people could get off benefits and into paid work, they would not only allow taxes on everyone else to be cut, but they would produce goods and services that would increase the country's income.

Other countries are doing much better. Unemployment in the United States in June was 4 per cent, in the Netherlands 2.7 per cent, in Switzerland 1.8 per cent.

We, too, have done much better in the past, with unemployment well under 1 per cent for 30 years until 1977. Our average incomes stayed roughly level with Australia's right through to the mid-1970s.

As our economy reeled under the oil shocks of that era, our Governments acted. After first cutting back, National Prime Minister Rob Muldoon quickly boosted state spending in the late 1970s with a succession of subsidised work schemes and "think big" energy investments, backed by subsidies for exporters and a gradually reducing exchange rate.

Our incomes grew at roughly the same rate as Australia's and other rich countries from 1978-84.

But this was financed partly by borrowing, which pushed internal and external debt to what were then record levels.

And with oil prices falling, it was already apparent by 1984 that "think big" was a big mistake.

Incoming Labour Finance Minister Roger Douglas attacked the debt problem by devaluing the dollar to help exporters and boost jobs, then restoring budget balance by removing export subsidies and winding down subsidised work schemes.

Accepting a Treasury view that economic growth had been held back by high taxes, subsidies and regulations, he halved the top tax rate, slashed protection, sold state enterprises and deregulated sectors ranging from finance to airlines. The Government deliberately left business to "the market." The result was mixed.

From 1988 to 1991, incomes plunged and unemployment rose to 11 per cent as the Reserve Bank pushed up interest and exchange rates to reduce inflation. From 1991 to 1995, incomes rose faster than the rich-country average, and unemployment fell to 6 per cent.

But since then, incomes have slipped further behind rich countries, and unemployment has stayed at between 6 and 7.5 per cent.

Now policy is swinging back again. Said Finance Minister Michael Cullen in July: "Our approach is more hands-on. We are committed to taking an active role in the economy to support good ideas and good people."

Initiatives so far include:

A new state entity, Industry NZ, with funding rising to $100 million a year to help new and growing businesses and regional development.

A new apprenticeship scheme costing an average of $10 million a year, under which apprentices can work for several different employers.

A $40 million increase in research spending, including new grants for private sector research and development.

An extra $7 million a year for Trade NZ to promote foreign investment and electronic commerce.

Raising the top tax rate from 33 to 39 per cent to pay for these and other measures.

Helen Clark has indicated that she will also overrule Treasury objections and restore more liberal tax treatment for research and development and state-backed insurance for exporters.

Her deputy, Jim Anderton, says the Government's industry development spending is puny compared with, for example, the $1.6 billion budget of Scottish Enterprise in a region of 5 million people.

Science Minister Pete Hodgson says: "We're simply becoming a bit more normal among developed nations ... We've been a Western world freak."

He has a point. A 1997 report by the Organisation for Economic Cooperation and Development found that member governments were spending $US50 billion a year on subsidies for research and development, environmental protection and start-up and growth of new businesses.

The United States Small Business Administration alone provides $US18 billion in loans, venture capital and advice for small businesses. Scaled down to New Zealand's population, that would be $630 million, several times what our "hands-on" Government is spending.

Ireland, with 3.8 million people - almost the same as our population - paid £129 million ($340 million) in grants to new foreign investors last year and £220 million ($580 million) in venture capital, training and research grants and advice to domestic businesses.

Australia spent $A155 ($206 million) million on export assistance, including grants for business representatives overseas, marketing trips, trade fairs and websites.

But the Business Roundtable believes even New Zealand's "puny" $100 million will damage our economy because it will tax "winners" to support economic "losers" who could not survive without subsidies.

In other articles today and during the rest of this month, the Weekend Herald will examine some of the policies that have been tried in the past, or are being used overseas, to generate high-paying work and reverse our long-term relative decline.

As Dr Wilson's students show, the context is global. For the first time in history, young people now see their future not primarily as the citizens of any country or empire, but as human beings who will choose where to live on the basis of their own economic, social and environmental values.

In the past 15 years, restrictions on trade and capital movements have come down almost everywhere. Cheaper air travel, telephones and the internet have made people more willing to move.

As a remote, island region, New Zealand always has lost many of its brightest to big cities overseas. Globalisation means we are sure to lose more.

If we care for our young people, we will ensure that they are as well prepared as possible for that global world. Some will choose to live in New Zealand. They - we - may be drawn here, or drawn back, by family and cultural ties, other social factors such as a caring and tolerant society, a good education system, a relatively unspoilt environment, space and the weather, as well as reasonable living standards.

Keith Phillips, who came from southern Africa and now runs IT Capital from Auckland with offices on three continents, says: "A lot of it is to do with people. The people are intelligent, well educated, outwardly thinking, internationally mobile, creative, innovative. And a lot of it is to do with the beautiful country."

So the economic challenge for those who choose to live here is not necessarily to earn as much as people in New York or Silicon Valley, but to create businesses and social organisations that generate whatever living standards we seek for everyone who wants to work here.

Exactly what standards we aspire to can be found only by trial and error. But they are almost certainly significantly higher than our present standards.

How we can lift our standards, and share them with everyone who lives here, is the challenge this series will address.

Herald Online feature: The jobs challenge

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