• Manufacturing Matters

    New Zealand has always been somewhat unusual in economic terms. With our emphasis on agriculture and primary produce – the characteristic most often of undeveloped economies – we nevertheless succeeded in achieving a high standard of living, to the point where – in the 1950s – we enjoyed one of the highest living standards in the world.

    In those days, however, our economy had a certain balance. Small as we were, we were not only efficient primary producers but had developed a manufacturing base that met a reasonable proportion of our needs and a service and retailing sector that was responsive to local control. Able to pay our own way, with an economy that was competitive across the board, we could look the world in the eye.

    Since that time, however, the picture has dimmed. As we have been absorbed more and more into a global economy, international competitiveness has mattered more and more, and our small size and remoteness have counted increasingly against us. We were not helped of course by fundamental changes in our trading patterns, such as the UK’s entry into the European Common Market.

    In any uncompetitive economy, the less competitive parts struggle and eventually disappear. Ever larger parts of our economy – like manufacturing – have found the going tough, and have the felt the pressure of having to compete with more efficient and lower-cost producers elsewhere. Only the most efficient sectors – in comparative terms – survive. An uncompetitive economy like ours becomes as a consequence more and more dependent on those fewer and fewer sectors that can compete in international terms – and in our case, that means primary produce, and even more specifically, dairy produce.

    We have chosen, however, not to recognise the remorseless economic logic that underpins these developments. We have behaved as though – as a total economy and not just in terms of rapidly shrinking proportions of it – we are highly competitive. We have cheerfully entered into free trade arrangements with all and sundry, including the most powerful and efficient economies in the world, apparently confident that we can take them on across the board without suffering damage to our own productive sectors.

    Worse, we have quite deliberately set about making the problem more serious. We knowingly pursue policies that – through offering an interest rate premium to anyone who will lend us money – drive up our exchange rate, which immediately makes our lack of competitiveness much worse.

    We then avert our gaze from the consequences of these policies. As though a perennial balance of trade deficit, a huge private sector borrowing requirement needed just to keep our heads above water, and the pressing need to sell off more of our assets to foreign owners than any other advanced country are not enough, we still blithely tell ourselves that we are doing well and that our economy is in good shape.

    As large parts of our economy cease to exist, our Pollyanna Prime Minister denies that there is a crisis in manufacturing; yet manufacturing jobs, manufacturing output, the balance of trade in manufactures, are undeniably all in a bad way. He does not seem to be aware – and if he is – seems not to care, that manufacturing’s share of our economy has fallen from 26% in 1972 to just 12% by 2009, and will have fallen substantially since. Even those parts of our manufacturing economy that do survive – Fisher and Paykel Appliances, for example – are being sold off to foreign owners.

    Does the manufacturing crisis matter? Yes, it does, not just because of the lost output, the loss of jobs, and the increased burden on our balance of payments, but because all evidence shows that successful modern economies build their success on efficient manufacturing.

    Manufacturing is the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and offers the quickest return on investment. Almost without exception, economies that have given up on manufacturing have struggled and have discovered that supposed substitutes are either castles built on sand, as in the case of the UK’s financial services industry, or deliver their benefits to only a small part of the economy, as in the case of Australia’s mining industry.

    By contrast, the world’s new economic powers – China, India, Japan, Korea – have built their strength on manufacturing, while the strongest of the longer established economies – Germany – continues to do likewise.

    We, however, tell ourselves that competitiveness is not something we need worry about. We wave goodbye to manufacturing with nary a care, and expect dairying alone to carry the burden of guaranteeing our prosperity into the future.

    But our competitive advantage in dairying is already being eroded as well. We are already treading the familiar path of selling off large chunks of our productive capacity and expertise in dairying to potentially powerful competitors and we have taken the first fateful steps in selling ­vital income streams from dairying to foreign owners. When dairying has followed manufacturing into decline, what will we do then to pay our way?

    Bryan Gould

    21 January 2013

    This article was published in the NZ Herald on 23 January 2013