That was the title of an article by Paul Krugman, published more than 20 years ago now, in the Harvard Business Review. The Prime Minister might perhaps consider reading it, and reflecting on it.
Yesterday morning the Prime Minister gave her promised speech on the economy. It was, frankly, astonishing how little there was there. There was some mention of the problems
Our overall objective is to build a productive, sustainable and inclusive economy.
On each score we have some way to go. When it comes to productivity, the OECD has said we are “well below leading OECD countries, restraining living standards and well-being”
We need to transition from growth dominated by population increase and housing speculation, to build an economy, that as I said, is genuinely productive, sustainable and inclusive.
First we want to grow and share more fairly New Zealand’s prosperity.
That means the gap between the highest and lowest income and wealth deciles reduces, real per capita income increases; the value and diversity of our exports grows and home ownership increases.
In particular we want to build our exports and have export led growth.
Which is all well and good, but there is nothing – nothing – in the speech about what the government proposes to do, and how it believes that the modest measures it does propose will deliver such better outcomes. And, of course, no mention of the government initiative which, on the government’s own consultative document modelling, would severely undermine the competitiveness of core parts of our tradables sector, and reduce GDP by perhaps as much as 10 to 22 per cent.
And this from a Prime Minister who has now been in office for almost a year. It is extraordinary.
But in this post I wanted to focus on the new Business Advisory Council the Prime Minister announced yesterday. Perhaps it is all just window-dressing, intended to get some favourable headlines for a day or two, and perhaps placate the odd sceptic in the business community (although one might wonder how many sceptics will be invited onto the Council). If so, I guess no real harm done.
But such councils can be a path towards cronyism. On the one hand, attracting sycophants who like to be able to tell their mates they have the ear of the Prime Minister. And on the other, more concerningly, enabling selected business heads to bend the ear of ministers and put pressure on them to make decisions favourable to the specific economic interests of those involved and their employers. That might not be direct subsidies – although we have had all too many of them in recent years – but might involve making the case for regulatory changes which skew the playing field against new entrants, in favour of incumbents.
But by far the bigger issue, if the Prime Minister and the government are at all serious about the lines they ran yesterday, is “what do chief executives of businesses know about overall economic management, and the challenges of New Zealand’s longstanding productivity underperformance?”. In Krugman’s words, a country is not a company.
Here are a few extracts from his article
What people learn from running a business won’t help them formulate economic policy. A country is not a big corporation. The habits of mind that make a great business leader are not, in general, those that make a great economic analyst; an executive who has made $1 billion is rarely the right person to turn to for advice about a $6 trillion economy.
Why should that be pointed out? After all, neither businesspeople nor economists are usually very good poets, but so what? Yet many people (not least successful business executives themselves) believe that someone who has made a personal fortune will know how to make an entire nation more prosperous. In fact, his or her advice is often disastrously misguided.
I am not claiming that business-people are stupid or that economists are particularly smart. On the contrary, if the 100 top U.S. business executives got together with the 100 leading economists, the least impressive of the former group would probably outshine the most impressive of the latter. My point is that the style of thinking necessary for economic analysis is very different from that which leads to success in business. By understanding that difference, we can begin to understand what it means to do good economic analysis and perhaps even help some businesspeople become the great economists they surely have the intellect to be.
Keynes was right: Economics is a difficult and technical subject. It is no harder to be a good economist than it is to be a good business executive. (In fact, it is probably easier, because the competition is less intense.) However, economics and business are not the same subject, and mastery of one does not ensure comprehension, let alone mastery, of the other. A successful business leader is no more likely to be an expert on economics than on military strategy.
And yet here was our Prime Minister yesterday (emphasis added).
The role of the Council will be to build closer relationships between Government and business, provide high-level free and frank advice to the Prime Minister on key economic issues and to create a vehicle to harness expertise from the private sector to inform the development of the Government’s economic policies.
“The Council will provide a forum for business leaders to advise me and the Government and to join us in taking the lead on some of the important areas of reform the Government is undertaking,” said Jacinda Ardern.
“The Council will report to me on opportunities it sees and identify emerging challenges. It will bring new ideas to the table on how we can scale up New Zealand businesses and grow our export led wealth.
“I want to work closely with, and be advised by, senior business leaders who take a helicopter view of our economy, who are long term strategic thinkers who have the time and energy to lead key aspects of our economic agenda.
Expertise on economic management, and the particular confounding challenges the New Zealand economy faces, just aren’t the sort of thing that tends to be fostered in the course of a corporate career. Many of these people might have been superb marketers, exceptional operations managers, corporate finance whizzes, smooth operators around the edges of regulation and the tax system, and have risen to assume overall responsibility for (by New Zealand standards) fairly large organisations. They are absolutely vital skills, and business roles done well are a big part of how, in pursuing the interests of shareholders, society is also made better off. But those skills bear no resemblance to the issues involved in addressing long-term economic underperformance. For a start, the things businesses have to take as given are precisely the sorts of things governments often can vary, and (as Krugman eloquently notes) the sorts of constraints even a large business faces are very different from those an entire economy faces. And so on.
There can be exceptions of course. Sometimes people with a strong background in economics end up in top corporate roles. Back in the day, for example, Don Brash as as private sector CEO was able to provide a valuable contribution in leading advisory groups around things like the introduction of GST. More recently, Kerry McDonald – former director of NZIER and later chief executive of Comalco and chair of the BNZ – has continued to bring valuable contributions (eg here) to policy discussions and debates (although probably not ones likely to see him invited to join the Business Advisory Council).
But I don’t see many (any?) such people in the top tier of New Zealand business today. The head of Air New Zealand – chair of the new council – is reported to be obsessed with politics, but I don’t think we’ve ever heard his ideas on New Zealand’s longer-term economic underperformance. Fonterra doesn’t have a permanent CEO, and Xero’s head is an Australian based in Australia. The film industry and the export education industry survive on explicit or implicit subsidies. And so on. But even if there were a range of hugely successful outward-oriented businesses led by stellar CEOs lauded by their peers around the world……..it is simply a totally different skill set.
In her column in this morning’s Herald Fran O’Sullivan, who tends to articulate the perspectives of (in the Australian term) the “big end of town”, is pretty keen on the new Council.
Luxon positioned himself well to take a leadership role.
He recently hosted Finance Minister Grant Robertson to a private dinner in Auckland attended by a number of CEOs.
On the guest list were KiwiRail’s Peter Reidy, Spark’s Simon Moutter, Mercury’s Fraser Whineray and McKinsey and Company’s Andrew Grant. The Warehouse chair Joan Withers was also present. …..
The chief executives at Luxon’s table are all “progressives” — interested in public policy, innovation and sustainability — and wanting to have a say and contribute to the direction of New Zealand.
Moutter led an innovation mission to Israel a couple of years ago to get a focus on the secrets to Startup Nation. Whineray led last year’s Go Swiss mission by business think tank, the New Zealand Initiative which delved into Switzerland’s focus on localism and vocational education — two contributing factors in that country’s success.
Kiwirail……that sink hole that absorbs billions of dollars of taxpayers’ money, contributing to our economic underperformance.
But it was convenient that O’Sullivan included this snippet, as before I read it I’d also been thinking of the cases of Simon Moutter and Fraser Whineray (the latter another head of a majority state-owned company).
As she notes, Moutter was dead-keen on the Israeli model. I picked apart that idea in this post (followed later by this one). As for Whineray and the Swiss trip (of which Fran O’Sullivan was part), they headed off to one of the very few countries to have had less productivity growth than New Zealand in the last 50 years (I wrote about some of the findings of the trip here).
It is great that these individuals care about New Zealand’s economic performance, but there is no particular reason to believe that in general they will have more useful perspectives to offer than the average moderately-educated voter chosen from the phone book at random. Running a business no more equips you to provide useful advice on economic policy more generally (as distinct perhaps from specific bits around your industry) than it does to, in Krugman’s words, write great poetry or make military strategy.
Of course, the usual pushback against such business advisory councils – again, at least if they are supposed to be anything more than window-dressing – is that governments have access to a range of high quality contestible advice from….well…. economists (in particular those in key public sector agencies). But that defence is weaker now that MBIE is run by an HR person with no policy or economics background (although apparently the CEO did previously work in Air New Zealand) and The Treasury seems to have given up on seriously addressing long-term productivity underperformance in favour of corralling a politically convenient, ideologically-driven grab bag of feel-good indicators into a forthcoming “wellbeing Budget”.