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Jim Anderton - Towards a knowledge economy

Why is NZ government slow to act on the economic imperatives of new technology’

Notes for an address to IPENZ Conference 2000
Towards a knowledge economy.

By Hon Jim Anderton MP Deputy Prime Minister Minister for Economic Development

Chateau on the Park, 189 Deans Ave, Christchurch

9.30AM Saturday, 4 March 2000

The theme of your conference is ‘Towards a Knowledge Economy.’

I’m a little suspicious when politicians use the term ‘knowledge economy’. As a rule of thumb, strident use of a phrase is usually a substitute for actual policies.

Confronted by terms such as ‘the information age’, ‘the weightless economy’ and ‘the death of distance’, we usually find a miasma of pious cliches follows not far behind.

So I want to be careful to outline what I mean by the ‘knowledge economy’.

A recent UK Government white paper on competitiveness defines the knowledge economy as ‘one in which the generation and the exploitation of knowledge has come to play the predominant part in the creation of wealth. It is not simply about pushing back the frontiers of knowledge; it is also about the more effective use and exploitation of all types of knowledge in all manner of economic activity.’

If you put it this way, the knowledge economy is one where knowledge is a more important component of production than simple exploitation of natural or physical resources.

Knowledge and innovation have always been critical ‘ at least since the Industrial Revolution’Probably since the first cave dwellers harnessed fire and employed rudimentary tools.

Now, though, we are seeing a more rapid shift in the structure of contemporary developed economies.

Innovation, intellectual capacity and technological advance are becoming relatively more valuable. Minerals, grass and crops relatively less valuable.

Brains are in. Brawn is out.

That represents a challenge for an economy like ours, which has been based very heavily on exploitation of our vast natural resources. We managed to profit from those resources in the past. For that we owe a debt to pioneers like William Saltou Davidson and countless other unsung innovators who followed on their farms and in their sheds.

Despite their legacy, New Zealand remains heavily dependent on our physical resources.

Concern over the slow pace of adaptation to new technology is not new. More than forty years ago, Bill Sutch was vigorously warning that New Zealand, as an agricultural economy, was particularly vulnerable to market closure or shrinkage.

In 1960 he wrote, ‘The future export industries, apart from those based on climate and indigenous materials, will need to incorporate a high proportion of skilled labour in them. New Zealand will import raw materials and export skill just as do other small but high-living-standard countries of the world.’

You have asked me to address the particular question of why successive New Zealand Governments have been so slow to act on the economic imperatives of new technology.

The simple, almost facetious, answer is that New Zealanders kept electing Governments that just didn’t care.

I don’t want to spend too much time looking backwards at why that was. I merely observe that it didn’t have to be that way, and if I have anything to do with it, it won't be in the future.

The consequences of neglect have been severe.

They were set out in a document the Alliance published before the last election, Partnership 2000.

For those of you who are anxious to find out more about where we are heading, I strongly recommend this publication. (In what may be a unique experience in recent New Zealand politics, this Government continues to refer to and implement its pre-election policy statements, even after the votes have been counted).

Partnership 2000 has formed the basis of much of my thinking in the few short weeks since the election as we have put together the new economic development dimension. It can be downloaded from the Alliance website. www.alliance.org.nz

In 1984, New Zealand’s per capita income stood at 95% of the OECD average. By 1992 it was down to 80.6% - a relative fall of 15%. The figure rose to 87% in 1995 ‘ still 8% behind the position at the beginning of the ‘hands-off’ era. It has slumped back ever since.

We have declined relative to other developed countries. And the decline is continuing.

Our GNP per capita growth is not as good as it used to be. Per capita growth from 1987 to 1997 was only a third of the growth achieved 1967-77 and 1977-87 ‘ and that was the period when things were so bad, we had to change ‘ remember’

The countries that have been powering ahead have been the majority of EU countries and East Asia members of the OECD.

Since 1970, the per capita income of EU countries has increased from 91% of the OECD average to 95%. Japan’s has increased from 86% to 115% and Korea’s from 20% to 67%.

They have been doing something that we haven’t.

In your invitation to me the point was made that ‘By comparison to Ireland, Finland or Singapore, New Zealand’s central government has been deaf to the reams of reports and books published by both independent authors and its own advisory agencies warning of the need to adapt to technological change.’

The warnings have been well founded.

The current account deficit alone should alarm anyone who examines the New Zealand economy.

We haven’t paid our way in the world for twenty-seven consecutive years.

At around 8% of GDP this year, the current account deficit is piling up a very substantial overseas debt. The servicing costs of that debt alone will be a very heavy cost to our nation's economy for a long time into the future. We talk a lot about the future cost of superannuation but very little about the future cost of past profligacy and spending more than we have earned overseas for twenty-seven consecutive years.

A study of our export structure shows it has been too slow to change over the last twenty-five years. Exports of complex goods make up a very low proportion of our income. This is a key sector for most other developed countries, large and small. Its output is highly differentiated, there is more scope for price-setting and thereby for generating higher incomes.

The era of hands-off did not generate structural change fast enough. It hasn’t significantly improved New Zealand’s trade position or our relative international income level.

If hands-off didn’t work, what can’

Successful economies like Ireland, Finland, Scotland and Taiwan have adopted pro-active economic development policies.

They have discovered that advantages are created, not endowed.

When I announced the formation of the Ministry of Economic Development and Industry New Zealand last week, I said the era of hands-off is over. The era of partnership has begun.

This government is committed to transforming the industrial base of New Zealand.

We are committed to entering partnerships with local government and the private sector to invest in new job-rich, high-skill, high-value industries on the technology frontier.

There have been many requests to spell out exactly which industries will be supported, and what level of support there will be. That is to mistake the partnership approach we are taking. The answers to those questions will not be determined by me in my office in Wellington. The answers will come from partnership between communities, businesses, the scientific innovative sector and Industry New Zealand.

The new approach will be flexible and dynamic. If it works well, we will do more of it. If it doesn’t work, we'll stop doing it.

There is no silver bullet. There is no blunt ‘one-size-fits-all’ theory which relies on a straightjacket of purity.

But there are some clear views about the solutions needed.

We need to combine well-judged public investment in education, infrastructure and science and technology with creative private sector investment focused not just on adopting technologies already available but on continuously creating new products, processes and designs.

Countries that have been successful at raising their per capita incomes have discovered some basic rules we can learn from:

First, higher incomes are crucially dependent on innovation.

Innovation is not just entrepreneurs thinking of new ways to make widgets. It is a systematic approach to technical progress, involving professionally conducted research and development in all sectors ‘ services and infrastructure as well as manufacturing and agriculture.

Official figures suggest that New Zealand’s expenditure on R&D is very low by OECD standards. There is some caution over this’ R&D tends to be over-reported in those countries where R&D gets a tax incentive, and it’s probably under-reported in New Zealand where R&D is not taxed favourably.

I don’t want to explore that issue at length here today, but there are some comments worth making about R&D in New Zealand.

The tax treatment of R&D will be studied as part of the Government’s review of the entire tax system.

More immediately, Industry New Zealand will be able to enter R&D joint ventures, with an emphasis on new technology industries providing sustainable, skilled, well-paid jobs and high added-value exports.

I am supportive of much greater public sector funding for science and R&D through Crown Research Institutes and Universities. The Foundation for Research, Science and Technology has cautioned the Government that a large number of worthwhile projects are being refused funding each year.

Universities receive only 18% of public sector funding for R&D, compared with an OECD average of 27%, even though they are internationally recognised as hotbeds of innovation and new business formation.

By under-valuing university-based research, New Zealand is likely to be missing out on a valuable source of commercial applications and new business formation on the knowledge frontier.

Second, the development of the skills of the population is very important.

Innovation and investment cannot occur without a well-educated population, equipped with a high level of industry-specific training.

A study produced last year by IPENZ chief executive Warwick Bishop found that the overall number of science graduates New Zealand produces each year compares well with other OECD countries. However we have a very low number of scientists working in research and development compared to other developed countries: Two thirds as many as Australia, the US or Canada and only one third of the number in Japan.

We produce only half the number of engineers as the UK or Canada and a quarter of the number in Germany, France, Finland and Japan.

And although the number of engineering graduates has been increasing, much of the increase is made up of overseas students who leave New Zealand after qualifying. More alarmingly, the number of New Zealand students who leave New Zealand after graduating is increasing steadily.

It is hardly surprising that our best and brightest are leaving New Zealand when we are burdening them with enormous debts for their education.

If we want to retain our most skilled young New Zealanders, we have to bring down the cost of education.

Third, there needs to be a high and relatively steady rate of new investment.

Investment raises incomes by directly increasing production and employment. It also embodies new technology. This introduces new products, raises outputs per person and improves the competitive position of firms and the country.

The sources of venture capital in New Zealand appear to be expanding. I’ve met a number of organisations recently that are demonstrating confidence in our economy by setting up new venture capital funds.

The traditional banks have not performed well in this area. They are risk averse. And the stock market is attracting pronounced criticism for its failures as both a reliable source of investment capital for new listings and as a source of steady returns to investors.

Industry New Zealand will provide capital for Small and Medium-sized Enterprises -- not only to establish new businesses but also to sustainably expand existing ones. Potential contributions could include direct development grants, loans and start-up equity capital.

Fourth, the public sector must supply investment to improve the productive capacity of the whole population.

This means the Government has to meet its obligation to invest in education, health care, infrastructure development, basic science and R&D.

The era of partnership will replace the ‘hands-off’ approach of the past. The new approach combines our educational, scientific and business skills in a strategic economic development programme. It won’t remove the operation of markets, but complement and improve their effectiveness.

Policies to create advantages for New Zealand must be innovative and skill-based. Created advantage arises from a process of continuous innovation. It is driven by the practical application of research and skills in new ways to produce goods and services people want to buy.

Successful economic development feeds on itself. It generates increasing returns to scale as it unfolds and as the level of technical capability rises.

The development of new skills and techniques, investment in technology and the involvement of the Government to provide investment, education, training and infrastructure are all crucial to success.

These features are the outcome of a vibrant partnership between the Government, private businesses and local communities.

ENDS

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