Trying to see the big picture

01/03/2012 § 6 Comments

I’ve been reviewing research on how well the New Zealand economy works. Good golly, there is a lot of it. People seem to come to one of two conclusions:

  1. yeah, nah, it’s about what you’d expect, or
  2. it’s stuffed and needs fixing.

I try to take each article or report at face value, at least to start with. I assume it is correct and the research is valid. How can I add it to all this other information in a sensible way? My problem is the divide between ‘it works’ and ‘it’s broken’ sometimes seems unbridgeable.

An exemplar of the first group is Phil McCann’s assessment based on economic geography. He says essentially two things. First, New Zealand is small and distant. Of course, lots of people have noticed that about the country. Then, he goes on to say that the global economy has changed. Face-time has become more important for the high-value, knowledge-intensive work that pays well. That work is not just knowledge-intensive but relationship-intensive. So, it’s no wonder that the country is stuck in second gear. Shaun Hendy’s blog posts have a fuller discussion.

McCann is not alone. Some folks at Treasury looked at savings rates. They found that Kiwis are by and large saving enough for their retirements. The savings side of things seems to be working as you would expect, given the wage levels and superannuation. Some other researchers from MED and elsewhere looked at R&D and patenting. They found that the innovation system was about what you’d expect, given size and distance and the structure of the economy. Findings on productivity, such as this and this, are more complex, but they don’t indicate that the economy is somehow failing.

There’s also lots of research for the other side. The Savings Working Group, for example, linked poor economic performance to a low savings rate, which must therefore be raised through various policies. Likewise, the Tax Working Group found that the tax system was holding the economy back and needed significant change. The Powering Innovation report made many recommendations about how to fix the innovation system, with its low R&D investment, low connectivity, and poor performance.

Also in this camp are the many reports that make the problem ‘cultural’. It’s New Zealanders’ focus on the boat, bach, and beemer; or businesspeople’s desire to keep their firms small rather than go for growth; or scientists’ lack of entrepreneurial spirit.

The resolution I’m toying with is to say ‘yes’ to both camps. Yes, firms are smaller and R&D spend is lower and savings aren’t as high as elsewhere. But, these are all rational behaviours given the context of a small, sparsely populated country far from the economic centres of the world. So, yes, it is about geography and we are doing fine once you control for it.

This changes the tone of the policy recommendations. It isn’t about claiming that the institutions (the tax system, the science system, the education system) are messed up and need to be fixed. Instead, it is about recognising that we’re pushing this economy uphill and asking what tools might help.


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