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  • Writer's pictureIan Fletcher

Productivity and Plans

VIEWS FROM OUTSIDE THE APIARY: IAN FLETCHER

By Ian Fletcher

We recently saw the end of the new Government’s first hundred days’ plan. At the same time, the quarterly GDP figures were published, showing a continuation of the gentle decline in per capita GDP, partly masked by very large numbers of migrants arriving.

New Zealand needs to change the tax system to reduce the incentive to speculate on property, rather than invest more productively, says Ian Fletcher.

This is our old problem of productivity: on a per person basis, we’re getting poorer. Remember, productivity shows how efficiently we use resources (people and skills, land and its resources, and technology, infrastructure and investment).

Of course this may turn around by itself. But I don’t consider we should count on good luck as a policy. As I’ve said before, we need to think hard about what to do. After all, if the economy gets moving for us all, then we have more resources, both individually and as a society to deal with issues of housing, health, police and crime, defence and so on. But it’s going to be hard to tackle: moving from decline to steady growth in productivity will be a big effort.

So, what can we do?

Fortunately, other countries have faced economic crises before. There is now some systematic evidence of what seems to work in a national turnaround situation, such as we now face. The UK’s Policy Exchange (a sort of policy research charity) has published a study, looking at the policy themes that underpinned an impressive list of national economic transformations.

They looked at Thatcher’s Britain (1983-2007), Germany after the War (1945- 1973), France after the War (the so-called “Thirty Glorious Years” 1945-1973), Ireland (1981-2020), Poland (1990-2020), South Korea (1963-2007), Hong Kong (1962-1988), and Singapore (1959-2007). It’s an impressive list of national success stories, and some quite remarkable turnarounds.

Systematic public investment in New Zealand’s infrastructure is sorely required if we are to avoid creating a tyranny of distance within our own country.

The first thing to say before we look at the lessons learned is that each of these countries might, to us, have appeared to face more acute economic (and often political) crises than we do. New Zealand today seems to face a chronic malaise, rather than an acute crisis.

But the truth is that we are gently getting poorer. As we do, our ability to tackle the (almost standard) list of challenges – housing, climate, health, schools, crime and justice, Māori partnerships and more besides – will get weaker, and we will face starker choices and harsh trade-offs.

The Main Themes

What did the Policy Exchange researchers conclude? They identified several themes among the countries they studied:-

Firstly, the big picture: success needs a broad strategy, not a detailed plan (things change too much to have long term plans). Leadership needs a team not just an individual, and a bit of luck helps: early wins combined with a clear vision of the future.

Secondly, the macro stuff: prudent spending and low inflation help, but aren’t decisive. Tax can be important (but not always). But that’s all, except for the crucial need to sustain and deploy high rates of saving and investment. The rest is micro stuff: strong competition policy and an open economy, education reform, infrastructure, employment rights and so on.

Where does that leave New Zealand? 

Crucially, short on savings and investment; perhaps over-focused on tax. And with a very weak competition policy – my personal measure of this is that we tolerate an intolerable duopoly in supermarkets, and a virtual cartel in banking, despite repeated studies showing how pernicious these arrangements are.

As well as seriously beefing up the Competition Commission, we need to boost Kiwisaver rates a lot, and change the tax system to reduce the incentive to speculate on property, rather than invest more productively.

The case for wider tax reform is self-evident: the government cannot offer services that match (high-tax) Australia without collecting more. Skilled people will leave, as they are. A point often missed here is that unionised Australia allocates a higher share of national income to workers than New Zealand, making Australia relatively as well as absolutely more attractive.

Infrastructure

Roads, rail, airports and so on. We live in a big, long, thin country. We often talk of the tyranny of distance in terms of our overseas markets; lack of investment at home creates a tyranny here we can and should correct with systematic public investment. The Crown has the best credit rating, and should use it. As I have said previously, I think New Zealand is over centralised. But it’s worth remembering that the decision to centralise government back in 1875 was in the context of a major public works (ie infrastructure) programme. That was the political bargain then; we now risk the worst of both worlds: continued over-centralisation, with nothing to show for it.

Finally, the dog that doesn’t bark: de-regulation

There’s very little evidence that de-regulation itself helps productivity. Indeed, I recall a conversation some years ago with a German colleague in the European Commission, who commented that only English-speaking countries thought de-regulation helped productivity. Everyone else understood that intelligent regulation, well-designed, could provide signals for innovation and improvement. The key was good design, close consultation with affected industry, and a real willingness to change things through experience.

“New Zealand today seems to face a chronic malaise, rather than an acute crisis,” concludes Ian Fletcher.

None of this requires a 100-day plan.

It does require an acknowledgment that solutions are possible but will take time, and some will be unwelcome, though necessary. Simple, “easy” solutions – like tax cuts – are likely to miss the point, distract everyone, and delay the inevitable.

It does require a competent and confident public service, willing to challenge and debate constructively, but also to then get on with the task of implementing and also monitoring results. We don’t have that public service any more, and that means government of any party is just less effective than we deserve.

And finally, it does require a degree of national consensus around the need to tackle our economic performance, and a matching willingness to co-operate with the process of reform. But I think things will need to get a lot worse before we will be prepared to face up to the long-term challenges exposed by our weakening productivity story, and allow ourselves to have the future we all deserve.

Ian Fletcher is a former head of New Zealand’s security agency, the GCSB, chief executive of the UK Patents Office, free trade negotiator with the European Commission and biosecurity expert for the Queensland government. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.


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