A country is not a company

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”

and

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.

and

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.

and

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.

and

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”.

 

15 thoughts on “A country is not a company

  1. Jacinda is correct that there is a statistically significant negative relationship between a centre-left government and business sentiment – both confidence and own activity – going back 30 years. However, even once you control for that variable, the level of business optimism today is consistent with GDP growth well below trend. Which is why McDermott and Orr are (rightly) concerned.

    I agree with your macro assessment Mike. The NZD is structurally too strong and policies to push up the non-tradable sector, notably immigration, have played a key part in this.

    But again, I’d stress the key problems we face are micro-economic, in particular the lack of competitiveness of large scale monopolistic enterprises in New Zealand. The appointment of a man who runs a SOE with a semi-natural monopoly from the Big End of town to build an advisory council will yet again reinforce this. We already have the MBIE, Treasury, RBNZ, Productivity Commission … do we really need to be shelling out more millions for this?

    Jacinda, the answer is in competition. The free market in a small economy like ours naturally gravitates to monopolistic or oligopolistic outcomes. It’s your job as PM to ensure that the country has a competitive business landscape not rent seekers controlling the economy.

    Liked by 1 person

    • We probably do differ in emphasis (I’d put relatively less emphasis on the competition issues, altho there are clearly some that need addressing) but I agree the symbolism of having the head of a majority state-owned company with domestic semi-monopoly isn’t at all good (including the fact that he is in the one part of the outward-facing sector not included in the net-zero carbon target).

      I presume any cost to the taxpayer will be quite small.

      Liked by 1 person

    • Peter, your throwaway line about rent seekers controlling the economy is just nonsense and is reminiscient of how Jews were being treated by Nazi Germany. Property investors are being unfairly picked on as the new Jew. Most property investors are just ordinary kiwis buying a single investment property as part of their saving for their retirement income. Yesterday I listened to John Campbell driving this Nazi propaganda against a Landlord with extremely bias reporting. He kept referring to Net of tax rent of $27k which is a lie and does not factor in the costs of holding that rental. Tenant was complaining about the swamp in the garden due to rain and her kids can’t go out to play and that the landlord was bad because he did not fix it. Unfortunately many housing areas in Auckland are flood sensitive and are part of a water overflow path and in raining weather the grounds unfortunately will hold water and Council actively encourages this. They do not want all that water to go into the public sewers and cause flooding elsewhere as the current infrastructure cannot cope.

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      • Looked up the pictures of the property in contention in Papakura and judging from the flooding issue under the house it does not look like an easy fix. The property sits on concrete piles and looks to be surrounded by concrete walls to try and block water from seeping under the house. This flooding issue is certainly not of the landlords making. He appears to be a migrant property investor that have bought and paid over the top for a swampy property in 2015 without being aware that there has been attempts to fix this problem in the past.

        This area is a high aquifer management overlay which means that the area has a massive underground lake that feeds into many many streams and rivers.

        Based on the pictures, this property looks to be in a newish condition likely done up in 2015 prior to being bought by this migrant landlord but likely a do up by a local kiwi to extract the maximum dollars out of gullible migrant property investors.

        Of course Phil Tywford and John Campbell with their Nazi style propaganda to paint landlords as greedy profit driven and uncaring people.

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  2. I thought you were a bit harsh on Robertson’s speech, so I looked at the PM’s speech and, well, you weren’t this time. There really is nothing there. It is as crying shame that a new government of young, seemingly uncorrupt and in many cases intelligent people, should have no new ideas (on economics) after nine years in opposition.

    As for the CEOs, the fact that they went to study two countries with massive productivity problems, both of which happen to be preferred holiday destinations for very rich people, absolutely galls me. If we just focus on productivity, housing inequality and environmental performance as our top three problems, there are at least ten other countries we should be studying. Many of them we can visit without incurring jetlag.

    Liked by 2 people

  3. Nabobs and Junkets
    The junkets by these nabobs to Switzerland and Israel – were any findings published, or were they classified as private. It seems you were able to offer assessments without even joining the junkets. Junkets and Nabobs and Top-end-of-town seems to sum it up. What was the point if results were not disseminated to the public. Who paid for the trips?

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    • I presume participation in both trips – one organised by the NZ Initiative and one by the Trans-Tasman Business Circle – will have been paid for by the participants themselves and/or their employers. There was some coverage in the various articles I linked to, including a fairly extensive one by Fran O’Sulivan on the Swiss trip.

      As private visits, what they do with any information gained is really up to them. I imagine the participants would argue that the visits enriched their understanding (and on details I’m sure that is quite true, as it is generally). Both countries may have ideas and experiences, positive and negative, we can learn from, but neither is a sort of beckon of overall productivity success.

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  4. Thank you MIchael for another very good essay. Your commentors here have also made valuable contributions to the debate – it is the micro-economic settings that need to be addressed in tandem with the rent seeking semi-monopolies (who probably don’t see it as that way). Airline(s), energy utilities, fuel companies, supermarkets, and so on.

    Rather than an elephant in the room it is Tyrannosaurus rex with the zero carbon plan. There is no discussion from either Luxon or McLean questioning the proposed policy and its extreme effects on New Zealand economically – which will have social consequences.

    The big end of town (masquerading as the Climate Leaders Coalition) have fallen into line with the climate yarn because they have safety in the herd. We should be concerned these are the same “thought leaders” in all these Government fora. They have become Jacinda and Grant’s pets and lead either near monopolies or oligopolies.

    The rationale is simple – if we all buy into it (and by their own boast they are 50 % of emissions) the carbon price settings will not cause any particular member or industry extreme outlying effects – new prices are simply passed on to their captive consumers. Perfect example of a collective.

    This also highlights the indirect power of the government as a partial owner of much of the country’s productive inputs (eg energy utilities) exacerbated by the oligopolies they inhabit, allied with Boards who have a sizeable component of appointments who exist at the “Minister’s Pleasure”. You don’t need a majority to carry the day – just member who has the ear or fear of the Minister.

    The monopsony granted to Fonterra through DIRA has not encouraged that company to be a worthy competitor to the Arlas and Nestles of the world but has given it the power to screw New Zealand suppliers and consumers.

    Not one of these CEO’s has said – the best thing the government could do is actively reduce redundant regulation and get the hell out of the way. Quite the opposite – collectives I say.

    Liked by 1 person

  5. Michael
    Like you I’m a little skeptical about the “big end of town” as a source of “free and frank” advice as opposed to advice that is tailored.
    When I read Hamish Rutherford’s coverage in today’s DomP/Stuff I took exception to his last line “it shows Government is listening”. Whereas my immediate view was “where is Business NZ and the Chamber of Commerce?”. I’d have thought that Government building lines of communication with business would be best done via the organizations supported and funded by business.
    To have consciously gone elsewhere isn’t just about showing a preference for “The Big End”, it is also about keeping a door closed on businesses’ own representatives.
    No doubt this new group isn’t exclusive, but it is hard to not draw that inference. And to wonder about why the Chambers and Business NZ weren’t at the breakfast.
    Tim

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  6. You have a good point about businessmen and politics. No comment about Trump but Truman was a good president and a failed businessman and for one great example of an outsider being a great politician: Ernest Bevin was a titan and changed from trade union leader to successful cabinet minister. He learned more pushing a handcart aged 14 than any of the UK’s elite politicians learned at Eton and Oxford. I still prefer Little to Ardern but maybe she is wise enough to listen and learn from him.

    Now how many economists have seriously helped guide a country? Somebody gave Germany, Singapore and Hong Kong good advice. But I can remember decades of economic advisors to African countries pushing ideas of state ownership of business; the idea was dying in PNG a decade after independence in ’75.

    The common theme is businessmen and economists are both good at giving the advice politicians want to hear.

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    • Re your last line, yes that is often true, although there was a time in NZ (the years prior to 1984 notably) when economists in official institutions were very much telling politicians what they didn’t want to hear.

      But it is entirely fair to observe that economists as a whole don’t have a great track record – and it would be strange to hear me suggest otherwise, having spent the last eight years suggesting that the mainstream official (economists’) view on a key aspect of econ policy is wrong, and is actually contributing to worsening our plight.

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  7. ….must admit, first thought on reading the speech: big business gets direct line to PM on immigration/work visas…….the power of blogs!!

    ps. can a company morph into a country? e.g. FAANG

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    • Companies can get very big, and they can even get quite powerful. But they can also be closed down – at least within a country – by a government at a stroke of a pen (see Google (not) in China). The main point though, of course, is that the skills required to build Amazon or Apple bear no resemblance to those required to govern a country (even in its econ policy dimensions).

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  8. To heck with inviting business into the tent – don’t know about other voters but I voted labour on the basis of their policies which were to roll back the crap handed out by the business neanderthals to the working people. Things like 90 day fire at will nonsense, selling off state housing, zero hours contracts and similar rubbish. Business needs a really good kicking, harsh taxation, strong regulation and to be driven back into the slimy stinking holes it’s vile leaders emerged from – only then will we even start to see a decent society

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