The government's knowledge economy report card

Tuesday 1st May 2001

Halfway into its term, how is the Helen Clark government handling New Zealand's biggest problem: transformation from a boots to a brains economy? Rod Oram got out his clipboard to rate the pollies.

The shock was predictable. When Helen Clark's troupe of school teachers and former union officials stormed the corridors of power vowing death to Tory inertia, what else could the business community's reaction be, other than dismay? Remember the plummet in business confidence? Remember the plunge in government approval ratings? The falling dollar? The anger over tax hikes, Accident Compensation changes, the new Employment Relations Act and a ballooning trade deficit? And don't forget the ugly standoff over who was invited to the government/business pow-wow. Back then, Unlimited judged it New Zealand's annus horribilis (December 2000).

The reaction may have been obvious to some, but it took Clark by surprise. The last thing she wanted was to be involved in the nitty-gritty of economic management. She planned to be chairperson of the board, overseeing her ministers as they worked through the election manifesto pledges on economic development. Too bad.

"I probably underestimated at the outset how much the Prime Minister would have to get involved in leadership," Clark says.

"When things got quite sticky in the middle of last year, I had to come out. We [the government] had to get into a constructive dialogue with business. I've been far more involved than I ever envisaged. It's been very time-consuming, but I'm absolutely fascinated by it."

The result? We've been bombarded by policies, programmes, taskforces, studies, working parties, steering groups, funds, awards, initiatives and partnerships. The newly created Ministry of Economic Development is one of the main strategists; Industry New Zealand its main instrument.

Clark and government tout these as the real tools of our economic transformation to a knowledge-driven economy. She delivered her first speech on the subject at the October business summit, reprising it more than a dozen times since. She pops up at business functions like an indefatigable evangelist for a "world class innovation system" that will "deliver social and economic benefits to all New Zealanders". As she told Unlimited: "I always adapt it to the audience, showing them how they fit into it. I say 'This is the road we're taking. Come along with us if you want to', and many have."

Suddenly, it seems, innovation, transformation and the knowledge-based society is hot ... but having a government hell-bent on moving us in that direction is also shocking. Involvement by politicians and bureaucrats in our economic lives is startling after 16 years of "hands-off" government. Is it a trip back in time? Think Big revisited? Even if it's a good idea, just how good is the government's knowledge economy transformation story, thus far? Seeking answers, Unlimited has run the rule over Clark and her class of 1999. Here's how they measure up.

What it's doing

Essentially, the government is working on three levels of policy: macro, micro and techno. Macro is the big picture, the playing field. On key issues such as fiscal policy, the centre-left government is similar to its centre-right predecessor, although it diverges on hot-button issues such as raising the top tax rate and restoring some powers to employees.

Micro is the small picture, the players. It's here that the shift to activist policy is most marked. The government believes it can use the machinery of state to help regions write and run economic development programmes, help industries forge and realise growth strategies, help companies enhance their skills and capitalise on opportunities, and help individuals better equip themselves for a fast-globalising world economy.

Since this is a knowledge economy, the third component - techno policies - is vital for getting research, science and technology right.

Let's get one thing straight. This is not Muldoonism revisited. The old style of government intervention was a heavy-handed, command and control approach. These days, the government lacks money and political support, and perhaps even the belief in operating that way. Okay, so the People's Bank looks like a $70 million throwback - but it's as much a New Zealand Post initiative as deputy PM Jim Anderton's.

That aside, we believe Clark when she says she's not trying to run a command economy. "We're looking for partnership, facilitation and co-ordination, which we will fund where necessary," she enthuses.

The rhetoric is a low-budget version of Britain's "third way" politics - the same sentiment and mechanisms, but with only small dollops of money. The approach is much less prescriptive than, say, the Irish way. For more than 20 years Ireland has targeted specific high-growth industries such as computer hardware and software. The emphasis here is on the government as catalyst.

Take what's happening with the Wood Processing Steering Group. It brings together three ministers, nine forestry chief executives, three mayors and a bevy of bureaucrats. The aim is to address the stack of issues holding the industry back from investing in timber processing. These range from a lack of roads and ports in Northland and the East Coast, to inadequate labour skills, troublesome trade barriers and thorny environmental issues. With a total of 11 departments impacting on it, the industry believes close government co-ordination is essential if the industry is to achieve its ambition: lifting itself from 19th largest forestry producer in the world to 5th, by 2025.

"From an industry growth perspective, the change of government is profound," says James Griffiths, chief executive of the New Zealand Forest Industries Council. "With the previous government, we had only made progress on trade liberalisation."

This government doesn't want to throw big money at forestry. Rather it will focus existing spending in a more intelligent, effective way, thanks to the co-ordination of regional and industry strategies. The journey has barely begun. So far, the government's programme is modest, looking like a beefed-up version of National's Bright Futures manifesto. But while National was bashful (a legacy of its "keep-us-out-of-this" mind-set), Labour-Alliance is gung-ho. The ideas and money are limited now, but could get bigger later, as our report card identifies (see box stories).

Reaction so far

Given that ideas about the knowledge economy, innovation and investment in business creation has, for the past decade, been the almost sole preserve of the private sector, how does business feel about the government's new stance? Does it approve?

Roger Kerr, executive director of the Business Roundtable, says government is wasting money on its handouts, bureaucrats lack the skills and experience to be involved in business problems (unlike "the very tough-minded Singaporean bureaucracy"), and the policies are no substitute for further rigorous reform, particularly in the areas of lowering tax, red tape and government spending.

Not everyone's so sceptical. Simon Carlaw, chief executive of the Manufacturers' Federation, is warming a little. "There was very little business-government contact prior to the October meeting. But since then the government has harnessed some interesting characters," says Carlaw. They are coming from the wider, more pragmatic business community. Big names include Stephen Tindall (The Warehouse - WHS), Sir Gil Simpson (Aoraki), Kerry McDonald (Comalco), Michael Andrews (Rubicon, aka the remnants of Fletcher Challenge) and Sir Angus Tait (Tait Electronics).

One of the key collections of business people comes under the Science and Innovation Advisory Council, or SIAC, chaired by Rick Christie (Rangitara Corp) and numbering the likes of Tindall, Tait, University of Auckland biochemist Michael Walker, and John Blackham, chief executive of software company Xsol and a member of Trade New Zealand's board. SIAC is "an exceptionally positive experience," says Blackham. "There's real energy because of the positive way the PM reacts to suggestions and initiatives. Labour has a genuine desire to see things happen."

Some warmth is also detectable among vocal critics of the government's traumatic troika of early legislative actions: higher taxes, ACC and the ERA. "We have cautious approval for the Ministry of Economic Development," says Anne Knowles, executive director of Business New Zealand, the organisation being created by the merger of the Employers' Federation and Manufacturers' Federation. "It's on the right track, focusing on infrastructure and existing companies rather than picking winners. But we're waiting for more concrete ideas to come forward." And the ERA? "Again, cautious approval. Unions, by and large, are behaving responsibly."

Political will

There's another reason this government can't be accused of taking a great leap backwards: Michael Porter. Remember him? This Harvard Business School guru of economic competitiveness has long taken an interest in New Zealand - ever since his 1991 report on our economic development. These days he's tracking what happens after countries go through their big, macro-economic reforms, à la Rogernomics. His results show that wealth is not created by the reform process but what business and government do with their newfound freedom.

"In advanced countries, which have largely gotten their macro policies right, it is micro-reform that holds the key to reversing unemployment problems and translating economic growth into a rising standard of living. In Canada, New Zealand and the UK, for example, macro reforms have triggered spurts of investment and growth, but have not yet materially increased the prosperity of the average citizen," he writes in the World Economic Forum's Global Competitiveness Report 2000, the Business Roundtable's favourite benchmark of New Zealand's performance.

Porter's views are credible and mainstream. It's his view of economic development that the Clark government is embracing and trying to deliver. But if the words sound right and the business community is warming to the new tune, does the government have the political depth and commitment to deliver?

"Buggered if I know what the head lady thinks," says a prominent Wellington business lobbyist. He says Clark has picked up the language of economic development but asks whether she really understands and believes it. The sentiment is echoed by Bill English, deputy leader of National: "We're not convinced at all that Labour has a deep-seated understanding of how the economy works and how it will be transformed. They've picked up a speechwriter's package currently in fad with left-wing parties around the world. It's all about building public confidence in the government's economic management."

"Helen's never had any exposure to business," says one senior businessperson working closely with her, "but she can intellectualise about it. She deals quite adequately with most business leaders, but it's got to be difficult for her to empathise because she hasn't had the experience. Her instinct instead is to play the national leader."

Clark says she understands exactly what's needed to transform the economy and that her learning curve began back in opposition with study trips to Asia, the UK and US. "We've got billions of dollars of intellectual capital in CRIs [Crown Research Institutes] and universities that we can move along to commercialisation. I don't see why we can't take off like Israel."

The verdict on her deputy, Economic Development Minister Jim Anderton, also changes according to proximity. Private sector people working closely with him say he knows what business needs and he can get government to deliver it. They cite, for example, his help in getting new yacht builders off the ground in Whangarei and Auckland. But they also suspect his heart is really with poor people and the regions, reflected in his interest in the People's Bank and his naming of the Ministry of Economic Development as "The Jobs Machine".

"Jim loses interest once a job pays more than $30,000 a year," says one businessman. It's nice that he has the Department of Conservation paying people in some small communities to clear possums from their forests, they say, if that's the first step on a road to local economic revival. If it isn't, then it's just a new form of dole. So far, the road map from possums to prosperity is undrawn.

And the views get much more critical: "If New Zealanders want to know what really discourages foreign investment, it's crack-pot government programmes like the People's Bank," says a Californian fund manager with some 1000 clients in New Zealand equities. "Wouldn't a tax cut have been a much better way to achieve savings? But alas, such a common-sense approach would not allow vote-seeking New Zealand politicians to play Santa Claus, buying the votes of the confused masses with their own money."

Behind Clark and Anderton, a few more ministers are deemed to be supportive of business, such as Pete Hodgson and Paul Swain. But suspicion about the disaffection of the rest starts with Finance Minister Michael Cullen and runs clear through Cabinet and two coalition parties.

"I don't believe there's a framework at the political level," says Simon Arnold, an economic adviser to Jenny Shipley in the last years of her government. "Labour-Alliance came to power with slogans and ideas, but with quite a lot of resentful stuff below the surface."

"We're dealing with pockets of enthusiasm for business - not with a government that is committed to it," says Carlaw of ManFed.

State sector sickness

Even if the government can earn its business brownie points, can the bureaucracy deliver? This is important, for no reason other than that governments come and go. As one of Cullen's staff points out, "Economic transformation will take two or three terms of government, which clashes with political impatience and the imperative of winning the next election."

That requires some robustness in the state service. Clark claims the bureaucracy was pretty short of good people, ideas and initiative when her government took power. More than a decade of restructuring and cuts had left it emaciated. "It was so hands-off for so long we didn't even have good information." Clark also complains about the public sector's ethos. She says it's been seriously diluted, resulting in bonuses, golden parachutes and an over-emphasis on the cost rather than the effectiveness of programmes.

Other complaints more widely expressed across the political spectrum (also made when National was in power) are regarding the shortage of good public sector chief executives and the fragmentation of government among 34 departments and more than 200 Crown entities.

Clark's response is two-fold: State Services Sector Minister Trevor Mallard is looking at how to rework architecture of the public service; and the State Sector Standards Board, chaired by Comalco's McDonald, is seeking ways to improve the bureaucracy. In its first report, the board said one impediment to good government is that "state sector activity is remarkably fragmented and needs to be strongly oriented to whole-of-government issues".

If you want a litmus test of whether government can help or hinder business through "whole-of-government" strategy and a plethora of micro-policies, look no further than Industry NZ. It has the biggest pile of new money, with scope to spend it widely across business and regional economies. Some of its programmes, such as those designed to help companies build up their business skills, will work quickly - if they're going to work at all.

Moreover, it could benefit from being a brand new agency with no baggage. Certainly, its architects claim that the systems put in place for administering and monitoring its programmes are 'state of the art'. However, such an agency would normally enjoy a large degree of autonomy from its political masters, with politicians having their say through policy design and oversight via the agency's sponsoring ministry.

In Industry NZ's case, though, it has an unusual provision written into its charter: it must take note of the desires of its ministerial patron - Jim "Jobs Machine" Anderton. This means investment and spending decisions could get more political as the next election looms. Some local government officials, long practitioners of economic development, are already worrying about INZ intruding on their turf and offering overlapping programmes.

INZ has also been slow off the mark, making do with interim chief executives and chairpeople. Only now are chief executive Neil Mackay (former managing director of Budget Rent-a-Car NZ) and chair Michael Andrews (chief executive of Fletcher Challenge, now Rubicon) taking up their posts.

Its board, with some exceptions (such as Maxine Simmons, founder of Immuno-Chemical Products), are old economy denizens: Greg Fortuin is managing director of AXA's corporate pension division; Rex Jones is retired secretary of the Engineers' Union; Don Riesterer is Mayor of Opotiki; David Moloney is executive director of Interlock, the metal hardware maker; and Shane Jones is chair of the Treaty of Waitangi Fisheries Commission.

Cut to the chase

With no apologies for being cautious, it's too early to tell if the government's on the right track. Certainly, Clark et al have hoovered up most of the conventional ideas about transformation to the knowledge economy touted over the past couple of years. But none of them are big ideas. Nor is the money large. They will only work if the ideas are catalysts, causing other, bigger things to happen in the economy. In turn, that depends on networking within business and partnerships between business and government. However, these conditions require organisations, cultures and skills which, to be honest, are in short supply. Have you networked with your favourite minister lately?

"Government and industry talk of partnership but they need the right infrastructure and culture on both sides to achieve that - and they're just not there," says one of the government's economic advisers.

There's also the question few have dared to ask: Is this level of intervention just too little too late? Some small countries have achieved success by targeting the industrial sectors they want to build: Singapore and computer disk drives; Finland and mobile phones; Ireland and semiconductors. To do so, they have committed large sums in tax breaks and grants to induce the likes of students and foreign investors to get behind their goals.

Trouble is, wholesale importation of strategies from the likes of Ireland or Finland don't work here. "We haven't found we can pick up anybody else's programmes and drop them in here," says Roger Wigglesworth, a senior policy developer in the Ministry of Economic Development. Instead, the thrust is to learn from other countries but develop policies tailored to New Zealand. One example is the seed capital fund, borrowing from the Israeli model of public/private sector co-funding, but private sector management.

National's response is curious. On one hand, deputy leader Bill English dismisses government policies as lacking content: "Government-sponsored innovation is something of an oxymoron," he says. On the other, he suggests there's a wider role a government must play. He offers no specifics, but surely he can't be suggesting a National government would be more activist than a Labour-Alliance government?

Think of doing less, not more, advises Alex Sundakov, director of the New Zealand Institute of Economic Research. There's little a government can do to spur economic development. "Getting economy fundamentals [macro policy] right is critically important. After that, there is no simple solution. The best you can do is tilt every single policy in that direction."

Government-as-facilitator is about as interventionist as New Zealand gets. Over the next 18 months we'll start to see how well this government does the job: klutz or catalyst?

Rod Oram is an Unlimited contributing editor

Rod Oram
oram@clear.net.nz

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