The Government’s Industry Strategy

When I heard yesterday that the now-former Economic Development minister David Parker had made an encore appearance to launch something called “From the Knowledge Wave to the Digital Age”, I wondered why he would want to remind anyone of the Knowledge Wave, a conference held under the previous Labour government in late 2001. Of course, my impression of that event was somewhat jaundiced by the fact that my boss, then-Governor of the Reserve Bank Don Brash, had made a “courageous” and somewhat ill-judged speech at the conference –  against the advice of many of his senior staff, at least as to content – that with hindsight could have been read as an audition for his post-Bank forays with the ACT and National parties (although I’m 100 per cent sure it wasn’t intended that way).

But the bigger problem is that, for all the talk, all the ink spilled, at that conference and through the subsequent Growth and Innovation Framework nothing much changed for the better.  The productivity gaps (New Zealand vs other advanced countries) didn’t start to close, the economy didn’t become more foreign trade (outwards and inwards) oriented, there were no fresh waves of greenfields FDI.   Instead, we had a reasonably strong cyclical upswing (rapid house price inflation, general inflation showing signs of getting away)…..followed by a nasty recession and a sluggish subsequent decade.

David Parker gave a speech at the launch of what is supposed to be “the Government’s Industry Strategy”, and that is going to be my focus here.  I haven’t read the full 50 page document, but I’ve skimmed through it and will include a few observations drawn from that.

Perhaps how people react to “Industry Strategy”  is one of the ways one tells them apart.  I was a bureaucrat for a long time  (but in the era in which the Reserve Bank believed in letting markets work and eschewed direct government interventions as much as possible), but when I hear the words “Industry Strategy” my heart does not leap with excitement, rather I think of the Soviet Union, the eastern-bloc, the People’s Republic of China (that not-overly-productive middle income country), or even –  more mundanely –  New Zealand’s own past failures in this regard: plans and conferences and strategies, often with little to show for it (when we are fortunate) but often enough with white elephants to mark the landscape, or memories of money just poured down the drain.  But I guess it is different in today’s Labour Party, or in today’s MBIE –  the modern version of the Department of Industries and Commerce (too many in the National Party seem to have had the same inclinations).   The government has a plan, a strategy –  or a whole series of them –  not for the economy as a whole (getting the basic structures right etc) but for individual industries.  And, with little accountability and no market discipline at all, they are keen to use your money and mine to back those strategies, boldly going where private investors have, thus far, decided not to.

As often with David Parker, there are sometimes glimpses of recognition of real problems.

I believe there is no doubt we inherited an economy based on excessive property speculation and high rates of immigration driving consumption led growth. The latest OECD report on New Zealand confirms this.

The infrastructure deficit left behind – not just schools, hospital, roads and public transport, but also private and public housing – will take a decade to catch up.

This is serious, but the adverse effect on productive investment was also profound.

Low per capita investment in our productive businesses has inhibited the diffusion of technology, and the development of innovative new products and services.

I wouldn’t frame some of it quite that way (notably that Labour trope about “excessive property speculation”) but, broadly speaking, he isn’t wrong.   Perhaps a shame there is no mention of the real exchange rate, at all, but it isn’t nothing.

The problem is, though, that this is buried deep in a speech which is mostly full of breathless energetic accounts of great things already done and great stuff the government (and industry) are about to do.

The flip side of the enormity of the 4th industrial revolution on the future of work, is the correspondingly huge potential for business.
It is an exciting time.
A myriad of new ways of new products and services are being made possible.
Most improve productivity.
Many are needed to decarbonise the world to avoid catastrophic climate change, or to combat pollution of our rivers and oceans. Others will overcome debilitating disease, improving the lives of millions.
I believe that it is the duty of every government to address both the future of work, and to maximise the up-side by chasing down as many of these commercial opportunities as we can, so as to harness the new jobs and value.

(I’m still old-school enough to think of outrages when I see the word “enormity” but let that pass).

Notice that second to last line, it is the “duty” of governments to “chase down” commercial opportunities.   In part, presumably, because in the Minister’s view it is all some sort of zero-sum game.

It is a race. Others want the prizes that we seek. 

Which isn’t the way most economists think of economic growth and development, perhaps especially not in a country that start so far behind the global productivity frontiers.

And then it just becomes completely delusional

Since the 1970s successive governments have wrestled with our productivity challenges; how we add value, upskill and diversify our economy.

We should acknowledge the important milestones and efforts of yesteryear.

They show that when we together have a plan and chart a direction, our economy strides forward.

To repeat, there is no time in the last 46 years –  say, since the UK entered the EEC (the Minister’s reference point) –  when New Zealand has made any sustained progress in closing the productivity gaps to the other advanced economies.  Instead, as I illustrated in Monday’s post, they’ve kept on widening.  They are widening now, after five years –  both governments –  of no productivity growth.

Of course, the officials themselves know this –  even if they squirm in their chairs  –  and, to his credit, Parker didn’t stop them including this chart in the fuller document.

MFP parker

It isn’t the chart I’d have chosen myself, but it makes the point nonetheless.  And recall that all three of these countries were already materially richer, with higher levels of labour productivity in New Zealand, back in 1990.

In fairness, the Minister does have a place for the private sector

Government can direct investment towards the regions, and champion sectors where we see a comparative advantage, but it is the mobilisation of the private sector which delivers the jobs the big gains.

Better if they just left aside the picking winners –  or even propping up losers –  implicit in the first half of the sentence.

And this is where the Minister praises the Knowledge Wave and the Growth and Innovation Framework, going on to note

Our predecessors identified three priority areas. These were chosen because of their potential for export growth and because of the underlying importance that competence in the sector had to the wider economy. Spillover benefits.

The crucial sectors identified were ICT, biotechnology (with a food and beverage bent) and, thirdly, the creative sector and design.

They got it right and I am pleased to doff my cap to those who called it at the time.

Not that reference to export growth.   We get this guff

Our telco competence is a considerable achievement, and a prerequisite to the development of Xero, Vista, Coretex and a myriad of other companies that sell software as a service, which have flourished.

And the other sectors have boomed too.

Fisher and Paykel Healthcare. A2 Milk and a range of other food and beverage companies. Weta Workshops and its spinoffs. Now household names. Billions of dollars in enterprises that have helped build our country.

The Growth and Innovation framework is the GIF that keeps on giving. Computer gaming, robotics, customer service avatars, nutrient monitoring software.

The race is on.

Our TIN200 companies are growing strongly, with technology exports now our third largest export sector (after tourism and agriculture). New hires abroad as well as export sales growth are described in the TIN200 report on the table.

One can pick all sorts of holes in that  (massive film subsidies for example, or the fact –  as I’ve documented here before –  that on no proper statistical definition of exports are “technology exports” “our third biggest export sector.  But don’t worry about those sort of picky details.   Wouldn’t the Minister’s text lead an uninformed reader to suppose that the outward orientation of New Zealand’s economy had markedly increased since the early 2000s?   Nothing in the speech suggests otherwise, but (again) lurking in the full report was the sort of chart I run here regularly.

exports parker.png

It just hasn’t happened.   There are individual success stories, of course –  as there have been throughout our history –  but it doesn’t add up to much, when productivity growth has lagged further, and our export/import shares have gone sideways or downwards.     That, apparently, was the legacy of those earlier planners (actually I doubt all their words etc added up to much at all).

But the Minister is breathless in his enthusiasm and goes on

Kiwisaver and the Cullen Superannuation Fund have deepened our investment skills and capital markets.

New Zealand Trade and Enterprise has been important in helping many exporters sector navigate their risky journey into new markets.

Our seed or angel investment capital market has matured. The innovation ecosystem has strengthened as management capability and globalisation ambitions have both grown.

We still suffer a gap in series A and B capital rounds, which this slide shows – something we have addressed in our latest Budget.

The $300m boost, and lead being shown by our largest NZ investor – the Guardians of the NZ Superfund – will attract private sector investment and help our firms to achieve their potential.

This will help to directly fill the current ‘capital gap’, and draw in other capital from NZ and abroad.

Give me leave to differ.   National savings rates haven’t improved materially, whatever NZTE has done –  let alone all those preferential trade agreements, which Parker is trying to negotiate more of – exports haven’t become a more important part of the economy, more firms aren’t showing they can foot it globally.       And when you are reduced to lauding a government money-pot, with no market disciplines and little accountability, as your catalytic hope, it is all a bit thin, and worrying to boot.      And I have no real idea what that final sentence means –  but if he means low rates of business investment, in reasonably well-run countries, private firms will invest eagerly to take advantage of profitable opportunities, when they exist.

The breathless energy continues

There is no time for delay. The seemingly exponential growth in opportunities will within just a decade or two morph into the law of diminishing returns.

At one level its simple, if we want these innovative parts of the economy to grow faster, we have to apply more of our precious resources to the task.

Don’t ask me what it means, but it would certainly good if there was some serious recognition from the top of government that our economic performance has really been pretty lousy for decades and an evident determination to get to the bottom of why, rather than just trying to pick a few more “winners”.

The gush goes on, sector by sector (you can read it for yourself), but haven’t we heard it all before.  They were probably discussing such things, enthusiastically, at the National Development Conference 50 years ago.

The speech ends with a full page on “Industry Transformation Plans”. I’m guessing they probably won’t come to much, so perhaps little harm done, except that more years pass, and more energy is devoting to avoiding the real issues.  Here is a sample of the Minister’s great enthusiasm for what government can and will do with these plans.

These describe an agreed vision for the future of a sector, and set out actions required to realise this vision.

Industry Transformation Plans are in train across large sectors of our economy – in agriculture with the Primary Sector Council for example.

Our first Industry Transformation Plan was the Construction Sector Accord. It was co-developed by an industry Accord Development Group. Industry leaders working with the Government.

Our next Industry Transformation Plans focus on four other priority sectors: food and beverage, digital technology, forestry and wood processing, and – as I have said – agritech.

The Prime Minister’s Business Advisory Council and the Future of Work Tripartite Forum will provide strategic leadership.

Key components of each plan will include assessments of the opportunities and risks from digitalisation, the future of work and skills training.

Risk sharing between government, businesses and labour to enable skills training to upskill existing workforces will be crucial to avoid the rising inequality which will otherwise flow from the future of work.

Each plan will also set out decarbonisation pathways, ways to increase exports, as well as an assessment of capital constraints. Partnerships are needed.

Business, workers and government all have a stake in every industry and we need to partner to make a real difference for New Zealand.

It is almost literally incredible.  The hubris, the lack of any apparent recognition of the limits of government knowledge, the complete absence of any sense of the benefits of vigorous competition, of creative destruction even, or market disciplines and so on.  Bill Sutch might have been proud.

It is sad in a way.  I suspect David Parker is better than this, and knows that this sort of stuff just isn’t likely to be any more transformative than the last (or first) wave of goverment talkfests.  But when you aren’t willing to even think about tackling the real issues  – the real exchange rate doesn’t appear in the 50 page document either –  I guess you need a lot of sound and fury, lest –  just a year out from an election –  it look as if the government is doing nothing, has no ideas, or doesn’t really care.  Sadly, all the talk is likely to signify almost nothing, in making a real difference, reversing the economic underperformance, and even building (in the government’s own words) “an economy that is more productive, sustainable, and inclusive for all New Zealanders”.

 

15 thoughts on “The Government’s Industry Strategy

  1. its the circular economy in action. Some lower level bureaucrat has recycled a speech of 5, 10, 15…. years ago; changed a few details – speech job done. very efficient.

    Liked by 4 people

    • Agree. And it wasn’t a very good speech then – reads as if written by someone whose first language is not English, and seems to be trying to fill the buzzword bingo card.

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  2. Thank you for doing the “mahi” for us Michael, it was very noble of you to persevere through this bureaucratic flim-flam. The best thing the government could do is get out of the way – eg far less regulation including dismantling the RMA, lower taxes, rescinding the ban on offshore oil and gas exploration. “Picking winners” has been a proven disaster in this country from “Think Big” to the Provincial Growth Fund. (Kneecapping the energy sector is however unprecedented, I have to admit). But socialists know all the answers. And now we are headed for the “zero carbon” apocalypse. The coalition’s Industry strategy is clearly to return New Zealand to the pre-industrial era.

    Liked by 1 person

  3. I have no problem with industrial policy, and see the economics profession swinging back in a Hamiltonian direction anyway. My concern is rather that without addressing the macroeconomic imbalances, any industrial policy is likely to have limited effect.

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    • What sort of things would feature in your industrial policy for NZ? (I agree that economics is increasingly indulging tendencies towards smart active government…….with few smart governments in view sadly.)

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      • I was surprised to read that Rocketlab, a New Zealand based Space Agency now has 500 engineers and rocket scientists with 400 personnel based in NZ. NZ has a natural advantage for rocket launching with Rocketlab now poised for quarterly rocket launches.

        I wonder how this next frontier high tech has been lost to US interests for a paltry sum of $300 million when the government is spending billions of taxpayer subsidies killing cows and stripping diseased kiwifruit vines. Rocketlab today is valued around $2 billion. NZ loss, US investors gain from owing the only privately owned space launch pad in the world.

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      • Probably trying to lower cost of capital for highly value added exporters. If they are venture backed, their cost of capital is let’s say 60%pa, so there is a role for a recoupable grant type program there to lower the cost of capital, if it’s tied to export performance. (Tying ongoing financial support to continuing increases in exports is key). Then work backwards from these industries to make sure the IP generation and commercialisation framework is working. For example, I would make sure the universities properly funded elite graduate programs in the feeder subjects for those industries. As Dani Rodrik says, there’s no one formula for industrial policy, and you can see that the policy prescriptions that people like Justin Lin have come to for developing countries differ quite a bit from Brad DeLong’s conclusions about the US, for example. In my view NZ needs a bit of each as in many ways it’s not a true developed economy (an idea I got from reading Walt Rostow’s book on economic development, which was written in the 50s!). Of course, I fully accept that the effectiveness of this strategy would be massive increased by getting the exchange rate under control.

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  4. What about giving free markets and competition a go. It might work, we haven’t really tried it in years. Government has picked the winners already Foodstuffs, Progressive, Fletchers etc. Go sector by sector and you find dominant players protected from competition. Markets don’t work without enough players. Competition is not like a rugby game, unless the game has 30 players with non of them on the same team.

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  5. Thank you for the post Michael, I found the launch of this quite curious. There was an acknowledgement that the idea is borrowed from Singapore which despite not being part of the OECD I think it is safe to assume has performed a lot better than New Zealand?

    That being said it was curious that there was the usual political puffery interspersed with hard data that contradicted the puffery. It got me thinking about what it must have been like living in the late Soviet Union where what was communicated by those in positions of power entirely contradicted what was happening on the ground. (See: https://www.amazon.com/Everything-Forever-Until-More-Formation/dp/0691121176)

    Why can’t there be a more grown up discussion amongst the Wellington policy making apparatus about solving some serious issues?

    That being said given Singapore (appreciating of course that their circumstances are quite different to NZs) have made industry strategies part of their success is there anything we can learn and adopt from this sort of thing?

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    • I’d have to have a closer look at the Singapore experience with ITPs. It is always possible some good could come from some of them, but the domestic track record with such things isn’t great.

      On your penultimate para, I was talking to someone yesterday, following this post, who reckoned that our “elites” (political, business, bureaucratic) have just given up on rigour, perhaps in reaction to the 1980s, and are now more interested in slogans. It isn’t universally so, but it seems truer than it should.

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  6. Thanks Michael, reading the document today I was struck by the sheer number of strategies and plans mentioned. It hails Singapore’s Industry Transformation Plans but fails to inform readers of their 17% corporate tax rate and 100% deductions for R&D expenditure (in fact 250% for some expenditure).

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    • Don’t forget Singapore also requires companies to contribute a employer superannuation of 15.7% of an employees wage. Retirement planning is excluded from income tax. NZ income tax includes Universal Super for pensioners.

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  7. Reblogged this on The Inquiring Mind and commented:
    This post by Michael Reddell raises several key issues and concerns. As usual the politicians go for platitudes and nonsense as reality hurts. Concerning is the idea that government should pick winners.

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    • The government does pick winners. So far it is primary industries that get the billion dollar taxpayer subsidies.

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