Get off the Grass

Kickstarting New Zealand's Innovation Economy

Shaun Hendy, Paul Callaghan

• Publisher: Auckland University Press
• Year: 2013
• Print ISBN: 9781869407629
• eBook ISBN: 9781775580768
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

In a brilliant intellectual adventure that ranges from David Ricardo and Adam Smith to economic geography and the science of complex networks, Shaun Hendy and Paul Callaghan explore how New Zealanders can learn to live off knowledge rather than nature. The key to increasing New Zealand's prosperity, they argue, is innovation in high-tech niches. To catch up with the countries that lure young Kiwis away, New Zealand needs to start innovating like a city of four million people; it needs to start taking science seriously; it needs to start seeing its people as people of learning, not just of the land. Get off the Grass provides a readable introduction to a wide variety of ideas including economic geography, network theory, and complexity theory; offers unique insights into the New Zealand economy and its long-term prospects; adds to current debates worldwide about innovation, science, economic growth, and networks.

CHAPTER 1

The New Zealand Paradox

‘The mystery is why a country that seems close to best practice in most of the policies that are regarded as the key drivers of growth is nevertheless just an average performer.’ – OECD Economic Surveys: New Zealand, 2003

One simplistic divide in politics is between those who wish to more equitably share the national cake and those who want to grow it. Among the most strident proponents of the latter is the school of economic thinkers known as free-market liberals. This chapter looks at some of their ideas, respectfully and carefully (we hope), and examines some evidence used to support their arguments. New Zealanders have been told that we are over-regulated and over-taxed and that if we just allowed our markets to work more effectively, prosperity would follow. We have been told this by politicians from the ACT party, and also in the report of the 2025 Taskforce. But if, as OECD reports suggest, we already have one of the most liberalised economies in the world then we must ask the question: is further deregulation and tax cutting really the solution?

2025 AND ALL THAT

The 2008 New Zealand election ushered in a new National-party-led government under the leadership of Prime Minister John Key. As part of its confidence-and-supply agreement with the minority ACT party, the government established a commission known as the 2025 Taskforce, whose brief was to make recommendations as to how, by the year 2025, New Zealand could bridge the GDP-per-capita gap with Australia. The Taskforce was chaired by Don Brash, a former Reserve Bank governor, and comprised in addition previous Labour government minister David Caygill, economist Bryce Wilkinson and Australian economist Judith Sloan. In an article in The Australian newspaper, Sloan stated: ‘In Australia, there is broad-based acknowledgement of the benefits of the reforms undertaken by the Hawke–Keating and Howard governments. These involved removing import protection, financial sector deregulation, privatisation and other pro-competition measures’. She contrasted this with New Zealand, saying, ‘New Zealand suffers from the consequences of an incomplete reform agenda’.1

The Taskforce recommended significantly cutting tax rates, selling government ownership in business and substantially enhancing property rights. Amongst its recommendations in health, education, environment and superannuation was that a funder–provider model should be reintroduced in the hospital sector, allowing much greater private-sector involvement in the provision of taxpayer-funded services. Subsidies for early childhood education and day care should be reduced. Mining developments on or under sensitive Crown land should generally be permitted provided that they pass a full cost–benefit analysis. KiwiSaver superannuation incentives should be abolished, and the New Zealand Superannuation Fund should be wound up and its assets used to reduce gross government debt.2

Comparisons with Australia are very interesting indeed. Curiously, the Taskforce made no mention of the much more generous early childhood education subsidies in Australia, nor mention of the Australian superannuation scheme where employers are required by law to pay an additional amount based on a proportion of an employee’s salaries and wages (currently 9 per cent) into a complying superannuation fund. After more than a decade of compulsory contributions, Australians now have more money invested in managed funds per capita than any other economy, around AU$1.5 trillion.3

The Taskforce report makes much of what it terms ‘New Zealand general government outlays as a proportion of GDP’, which it asserts are much higher than in Australia. This is the case if one includes expenditure by New Zealand state-owned enterprises, such as Meridian Energy and Kiwirail, in the New Zealand government’s books. But if we restrict ourselves to looking at core government spending, we find that in the decade prior to the Taskforce’s report, Australia’s government spent an average of 35.2 per cent of its GDP compared to the 31.9 per cent spent by New Zealand’s government.4 New Zealand does have proportionately more companies in which the government is the majority shareholder, but given that these companies operate much as would any other private company, it is debatable as to what degree these should be considered part of government involvement in the economy. Each company has its own peculiar history and readers may form their own judgements as to whether these were wise investments for the taxpayer or whether each should have been sold or left in private hands. It seems difficult to believe that public ownership of companies like Kiwibank or Mighty River Power is a key distinction between the economic performance of New Zealand and that of Australia. Yet the general overview of the 2025 Taskforce recommendations is that government is too big in New Zealand and that property rights are too weak. In a speech reported in the New Zealand Herald on 3 September 2011, Dr Brash stated, ‘I believe that the single biggest hurdle facing New Zealand’s economic future is this creeping erosion of property rights’.

Is the Taskforce correct? We don’t think so. To show you why, we’ll take you through some of the ideas that underpin free-market economics. We will lay out some of the fundamental prerequisites for prosperity through a recipe of open markets, property rights, effective legal rights and frameworks, and a lack of corruption. We will then see that New Zealand already leads the world in terms of these benchmarks, and we will conclude that it is just not convincing to lay the blame for New Zealand’s weak economic performance on taxation, regulation or the erosion of property rights.

THE FIRST ECONOMIES

When humans lived in small bands of hunter-gatherers, generalist skills were the key to survival. An ability to recognise the right berries to eat, how to lure or stalk prey, how to generate fire, how to recognise friend from foe and how to care for the young were critical skills. Each person needed a reasonable grasp of some of these skills and each family group needed to possess most of them. Then, with the birth of agriculture, humans learned to specialise, and with that specialisation came efficiency gains, the growing of surpluses and hence wealth, and the expansion of the human population of the earth. The key to specialisation was the ability to trade, and civilisations grew where trade was most highly organised and efficient, and where the surplus wealth resulting from these efficiency gains was greatest. It is not surprising that some of the most impressive civilisations developed around the Mediterranean Sea, and around the great rivers of Asia, since merchant trading by means of these communication avenues enabled widespread contact between regions and communities with differing local skills or resources.

Trade between these communities allowed each to benefit from their comparative advantages. To see how, let’s imagine a pair of ancient island civilisations in the Mediterranean, which are able to trade freely with each other by sea. One of the islands is much more fertile than the other, so every year its inhabitants have the ability both to grow more olives and raise more sheep than those on the other island. However, the farmers on the more fertile island happen to be better at growing olives than they are at raising sheep. This means that they will be better off if they devote their island exclusively to growing olives and trade these for sheep from their neighbours. The fertile islanders have a comparative advantage in olives, and this means that the islanders on the less fertile island have a comparative advantage in sheep, even though they do not have an ‘absolute’ advantage. They can trade sheep with the fertile islanders to get more olives than they could grow themselves with the same resources. Each civilisation gains by specialising and trading in the crop for which it has the comparative advantage.

But there was another time-honoured way to prosper, and that was to plunder rival states. So grew empire, which to the subjugated at least meant relief from further pillage from other military states, and the possibility of trading across the imperial realm. And with empire came taxes, since central military power and the perks of the elite depended on enforced contributions of surplus wealth. With the ultimate collapse of the Roman Empire, Europe, with its diversity of regions and languages, developed a system of autonomous estates, manorial enclaves in which feudal lords provided local protection in return for ownership of lands and livelihood. Peasants had cultivation and grazing rights, without property ownership, on common land provided for their shared use. Part of the peasant’s time was given in agricultural work on behalf of the lord. Feudalism was governed by a moral framework, in which each person knew their place and in which the different classes recognised their mutual obligations. In Europe, Christian morality prevailed, and money and its associated activities were generally held in disdain. It was a system that provided a degree of social stability, but it was economically stagnant, since there was little incentive for those involved in agriculture to grow surpluses that would be expropriated, or to develop assets they did not own.

But alongside feudal society there coexisted a merchant class. Feudal authority needed merchants and traders, if for no other reason than that military capability required access to the best technologies and skills, and to the specialisations and trade that enhanced it. There were also highly prosperous trading enclaves, such as Bruges, Lübeck, Bergen and London, where merchants and their guilds were dominant. These towns raised armies and protected each other in what came to be known as the Hanseatic League.

Ultimately, the merchant class prevailed. The process began most obviously in fifteenth- and sixteenth-century Italy, where merchant republics emerged. With that emergence came a flourishing of trade and the ...

Table of contents

• Cover Page
• Title Page
• Contents
• Foreword: Economic Discovery
• Introduction: New Zealand’s Prosperity
• 1 The New Zealand Paradox
• 2 The Economics of Growth
• 3 Innovation and Economic Growth
• 4 Innovation Ecosystems
• 5 New Zealand’s Innovation Economy
• 6 Letting Winners Pick Themselves
• 7 The City of Four Million People
• 8 Culturing Change
• Afterword: A Last Voyage
• Notes
• Further Reading
• Index
• Copyright Page
• Backcover