By Dr Wolfgang Scholz , director,
Heavy Engineering Research Association (HERA)
Don Brash's Productivity Taskforce report (released late last year) has received a swift response. Finance Minister, Bill English has labelled the report as 'too radical'. EMA, Business New Zealand, and the Round Table welcomed its fundamental principles while a majority of commentators observed that it is nothing new and is basically an Act Party Blueprint.
However, in my view there is good analysis in the report and I found the chapter 'Understanding the Problem' particularly interesting reading. I will limit my comments to what is relevant to our industry and especially to the section in the report entitled, 'Policies Which Should Not Be Adopted'.
Just a few facts from 'Understanding the Problem' on the negative side of the balance:
- New Zealand's GDP as compared to the OECD average has lowered consistently over the last 20 years, and last year Australia's GDP was 35 per cent higher than ours. (On that measure, an average New Zealand family of four is worse off than their Australian counterparts by around $64,000 per annum)
- Industry R&D spending is far below the OECD average
- Firms operating in New Zealand invest, on average, very little per worker relative to other countries
- Cost of capital is high.
On the positive side:
- New Zealand's institutions, i.e. system for doing business, are considered some of the best in the world. New Zealand's size and location, while having an influence is not a disadvantage as some other small countries who are higher on the OECD scale have demonstrated
- New Zealand's workforce does well on OECD average in terms of tertiary qualifications
- New Zealand's workforce does long hours
- New Zealand's government spending on R&D is close to average
- The number of researchers per head of population is up with the best in the OECD.
My analysis of the problem as it relates to New Zealand's productive industry, shows that
industry needs to improve its act in terms of innovation, including R&D spending.
Industry needs to commercialise its R&D by focusing on global markets and by investing in equipment and processes to improve its operations. The result will hopefully be higher
productivity, resulting in a lift in GDP and commensurately higher earnings.
The solution proposed by Don Brash's Taskforce, to get industry moving, is largely based on a philosophy of 'let market mechanisms rule'. This calls for Government to tighten spending which will allow reductions in taxes. With reduced taxes, it is assumed that business will spend more on pursuing new and more profitable business.
However, a question in my mind is: Will limiting government action to shaping the environment for doing business on its own create sufficient momentum to transform our industry to innovate and export and in the process, close the gap? From my understanding of industry, I very much doubt that this will happen from market forces alone, especially given our distance from markets and the considerable expense involved in levelling the playing field for New Zealand exporters.
One thing that differentiates successful economies, is strong leadership from Government and an element implicit in the report is that Government should take a back seat to market forces. This is best illustrated by the section in the report called 'Policies We Recommend Should Not Be Adopted', which discusses items such as R&D support, sector based growth strategies, and productivity development activities.
The Taskforce clearly says that, 'materially lower marginal tax rates and a lower cost of capital are much more likely to lift overall economic performance and, probably, private sector research and development spending too, than targeted tax credits or similar spending'.
The key word here is 'probably', whereas mechanisms like tax credits which are easily accessible by all of industry are a proven driver of R&D activity. This section of the report decries sector based growth strategies, which in an economy geographically isolated from many markets are particularity important. We only have to look at Spain, Germany, and the UK to see that sector strategies around the development of clean technology are creating significant levels of IP and business opportunities.
The reports talks about the example of 'Green' industries and says that: 'There appear to be a wide range of exciting prospects around many of these technologies, and we would expect private investors to be eager to take up the opportunities that offer genuinely commercial, risk-adjusted, returns.' This view fails to recognise the gap that exists between concept and a product being developed enough to attract investors.
Most investors are looking for technologies that offer a step change. To reach that level takes a great deal of effort, investment and the infrastructure to support the development. Sector based strategies can help encourage domestic uptake of technologies to provide a market base for further development and support the entry of products into the international marketplace. To assume that New Zealand can adopt a pure market approach without leadership, focus and a channelling of resources is myopic at best.
I had hoped for a detailed plan which industry and Government could get behind to drive our economy forward. Instead we have an ideological 'the market will rule' philosophy that fails to motivate. In the absence of cogent leadership and support, our industry must continue to forge forward and work together to do what we can to improve our businesses and our GDP.
For more information contact: HERA, Tel: 09 262 4848 or Email: exec@hera.org.nz
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