• Catching the Knowledge Wave?

    The briefcase I use to carry my papers and laptop to meetings bears a multi-coloured logo and the words “Catching the Knowledge Wave”. As Fran O’Sullivan recalls, the outcomes produced by that high-level conference in 2001 – designed to unlock the secrets of economic success as overseas luminaries revealed brilliant ideas and initiatives that had hitherto eluded us – proved disappointingly humdrum.

    It turned out that there were few mysteries to divulge. The explanations for economic success were all too obvious and commonplace. Ireland, for example, in whose apparent prosperity there was a great deal of interest, was the beneficiary of European Union largesse which created an asset bubble that eventually burst. Australia, as has become increasingly clear, has the great advantage of being able to dig up its barren interior and sell the product to a mineral-hungry world.

    Other explanations are equally obvious. Developing economies like China and India now, and Japan and Korea before them, do well if they can access mass international markets and exploit economies of scale by combining cheap and plentiful labour with rapidly growing technological expertise.

    And wealthy mature economies that focus on re-investing in new wealth creation, like Germany, will do better than those, like Britain and now the US, that give priority to the protection of existing asset values and to consuming more than they produce.

    Developed economies that suddenly benefit from a new source of wealth, like the discovery of oil, will do badly if they simply spend the proceeds through allowing the exchange rate to appreciate – as the British and the Dutch did, as the Australians may be in the process of doing with high mineral prices, and as we are in danger of doing with high commodity prices.

    Those, like Norway on the other hand, that invest the proceeds in new assets so that they go on producing wealth after the initial benefit has dissipated, can enjoy a long-term benefit to economic development.

    Yet, despite these commonsense conclusions, we in this country still persist in seeking the magic elixir that will propel us into the economic top league. We still believe that one more Jobs Summit, one more nostrum from the latest management guru, one more ministerial exhortation to improve productivity, one more brilliant new piece of research, will do the trick.

    We have been unwilling to face an obvious truth – that economies are such large, complex and multi-faceted fields of activity that it is very unlikely that single, focused initiatives – even if worthwhile – will make much, if any, difference.

    Of much more importance in determining whether economies perform well or otherwise, and whether or not they are stimulated to innovate and develop, is the broad context in which they operate. It is that context we should focus on. But that is precisely what we’re not prepared to do.

    There are of course some contextual factors, such as the terms of trade, we can’t control. But even when those factors are, as they are today, the most favourable in nearly thirty years, we still manage to negate that advantage by allowing the rising dollar to reduce the return to our primary producers and to create a two-speed economy by penalising the rest of the productive sector.

    And we insist that every such improvement in our national income is an inflationary threat, rather than an opportunity to strengthen our productive capacity. It is as though we have no faith in the propensity of a market economy to grow and develop.

    But it is when it comes to managing those factors that we can control that we fail most spectacularly. We kid ourselves that we are focused on the need to save, invest and export more, and that we must consume, borrow and import less. But our policy settings actually encourage exactly the opposite.

    Our narrow focus on inflation means that every opportunity for growth is sacrificed to shackling the inflation bogey. The decades-long use of high interest rates means that investment is constantly deterred. And because perennially high interest rates create an over-valued dollar that buys in the short term more than it should, we encourage people to consume rather than save and to import rather than invest in our own productive capacity.

    The poor return on productive investment –and the high dollar means that margins and market share are driven down, and our productive sector is less profitable than it should be – further discourages saving and investment, other than in non-productive assets like housing, where asset inflation is fuelled by reckless bank lending. Our attempt then to maintain a standard of living that our poor performance means we cannot afford makes overseas borrowing and asset sales more and more necessary.

    These are not short-term issues. They have been endemic for nearly three decades. And we are about to do it all again, as overseas opportunists drive up our dollar, confident on the basis of thirty years’ experience that we will be stupid enough to continue to pay them a premium.

    If we really want to change our fortunes, these are the issues we must address. Instead of vainly looking for the silver bullet, what about catching the commonsense wave?

    Bryan Gould

    11 June 2011

    This article was published in the NZ Herald on 14 June.

  • The General Election Judgment

    A three-year electoral cycle may have its detractors – and, many would say, with good reason – but it is usually popular with first-term governments. The record shows that three years is not really long enough for voters to reach a definitive view that a recently elected government has failed, and the benefit of the doubt will usually mean a second term.

    Add to that a Prime Minister with an unusually acute instinct for the popular gesture and the 2011 election might reasonably be thought to be a shoo-in. There is, however, one possible fly in the ointment.

    “It’s the economy, stupid,” might not be such an obvious determining factor as it was claimed to be in Bill Clinton’s run for the presidency, but the way Kiwis feel about their economic situation on election day will clearly have a bearing on how they vote. And on that issue, the government’s record may not bear too much close scrutiny.

    The government inherited an economy which had already been in recession for most of a year, and which had then been assailed by the global financial crisis. Dealing with that recession and building an economy which would – as we emerged on the other side – reverse our decades-long comparative decline, was surely the most pressing task facing the new government.

    How, after three years in office, will the government be judged to have done?

    They have, after all, had their fair share of good luck. Record commodity prices have underpinned the economy and helped the balance of trade. Our banking sector has remained, by world standards, remarkably stable – though the same can’t be said of our finance companies. Our major export markets – Australia and China – have been beacons of light in the recessionary global gloom.

    Yet – our unemployment remains stubbornly high, the retail trade is flat on its back, the housing market has stalled, business confidence is low and business investment equally so, the protections that the vulnerable depend on in tough times have been reduced, and the talk is all of further cuts.

    The early flush of energy and enthusiasm – remember the “jobs summit”? – seem to have evaporated. The recession has lingered on well beyond what the forecasters predicted. There is precious little to show that the government has done more than hold the ring. We look in vain to see where the lift in demand and employment is to come from.

    And, most seriously, if and when we do recover, there is no evidence that anything will have changed. The problems that have dogged us for decades will remain unresolved.

    That, after all, was the central point made by Standard and Poor’s before Christmas. When they warned of a credit downgrade and placed us on negative watch, they pointed the finger specifically at the prognosis that, as we eventually do emerge from a protracted recession, all of our entrenched problems will also re-surface.

    They predicted that we would return to our bad old ways of failing to save and invest and wondering why our productivity does not improve faster, of bingeing on artificially cheap imports and expecting to be able to borrow overseas to fund our excessive consumption, of wringing our hands while our counter-inflationary policies force up interest rates and an already over-valued exchange rate.

    It was the prospect of the resultant deficit – the country’s rather than the government’s – and our reliance on overseas borrowing, that caused them real concern. Unusually, a credit-rating agency seems to be taking a longer-term view than that of our own government. Their message seems to be that, unless we grapple with those long-term problems, our credit rating is at risk.

    If all of this remains true on election day, if the remnants of recession still linger on and we are poised to resume the unsustainable rake’s progress that has held us back for so long, how will the voters mark the government’s report card? It has to be said that, as the outcome of three years in office, it would not look good.

    The government would surely not want to face the voters with a record that shows that nothing had really changed. Changes to the tax system, a renewed and welcome emphasis on research, and largely administrative fiddling with the delivery of education and health services may have their proponents but are hardly the stuff of fundamental economic reform.

    The Prime Minister is nothing if not a pragmatist. As he approaches the election, he will figure that he has most bases covered. He would be uncomfortable, therefore, with any vulnerability on his government’s economic record. Can we expect that he will understand the need – however belatedly – for an “agonising re-appraisal” when something isn’t working and to strike out in a new direction?

    Bryan Gould

    18 January

    This article was published in the NZ Herald on 24 January.

  • Bridging the Teaching Divide

    The recently published assessment that New Zealand has the best education system in the world is a valuable antidote to our predilection for beating ourselves up about our supposed failings in this regard. It should not, however, reduce our vigilance in identifying issues that will continue to need attention.One such issue is the perennial complaint of tertiary institutions that school-leavers are inadequately prepared to study effectively at tertiary level. This complaint has been around for as long as there has been university education. To some extent, it is simply a reflection of the belief of every older generation that standards have slipped. Supposedly sliding standards of grammar, spelling, and general literacy have all been targets.But the issue may not be as simple as that. One example of an area where the complaints may have particular substance is in maths and science, and particularly physics. Universities are constantly urged to produce increasing numbers of graduates in these areas, but – all too often – school-leavers themselves are deterred from studying these subjects because their secondary education has left them short of the level required for university study.Whatever the truth of that, there is growing concern about a new and different problem, involving not so much what is taught as how it is taught. Secondary education has, over recent years, undergone major changes. The introduction of the NCEA, in particular, has signalled and required a substantial shift in how students are taught and how they learn.There is a growing acceptance across the education world that these changes have been – on the whole – beneficial. Students themselves have responded well. Most students have flourished in a regime which encourages them to work and to stay involved over a whole period of study, rather than one that simply requires cramming when it comes to exam time. Our top world ranking suggests persuasively that we are reaping the rewards of these changes.These worthwhile changes may nevertheless have created a new disjunction between the methods and skills needed for studying and learning at the secondary level, and those required at tertiary level. It may be that tertiary education has not yet fully woken up to the new and different skill sets that students bring with them as they begin their tertiary studies.Much secondary teaching now rests less on formal teaching, where the teacher provides the information and tuition and the student then assimilates and regurgitates it, and much more on informal collaborative and group work, on inquiry and project work, on assembling and exploring relevant information from sources other than the teacher. The aim is to raise involvement and interest levels and to prepare students for new kinds of life-long learning in the modern world.These changes are of course not only a function of different teaching methods. They also reflect the student’s experience outside the classroom – an experience greatly influenced by today’s electronic media and in particular by the internet.The results, however, have a downside – at least from the viewpoint of the traditional university teacher. The first-year student is increasingly unfamiliar with what is required for university study. Taking in, understanding and then articulating a particular body of knowledge, mastering it accurately and comprehensively and then demonstrating that by putting it in written form in a properly constructed paper or essay which offers a reasoned conclusion – these are skills that have not been practised by many of today’s school leavers. Little wonder that some struggle to adapt.The evidence that this should be a cause for real concern is still quite fragmentary. Further research is needed, and is currently being undertaken in a number of projects supported by Ako Aotearoa – the National Centre for Tertiary Teaching Excellence. It is clear that if we want our tertiary institutions to produce the best-equipped graduates, we must be alert to factors such as this which might inhibit the ability to get the best out of tertiary education.To identify this possible disjunction is not to apportion blame, or even to think that there is blame to apportion. But, if the gap exists, it should be addressed. The benefits of the changes at secondary level have been too great to be cast aside, but we will all benefit if tertiary students are helped to achieve a better learning experience by closing the gulf between the demands of secondary and tertiary education.It is already the case for some students who are thought to have been disadvantaged at secondary level that they begin their tertiary study with an introductory course in what is needed for success at that level. This should perhaps be provided as a matter of course to all first-year tertiary students. It would of course add to the costs that taxpayers and students alike have to bear for tertiary education. But, if the outcome is that we get better value for the resources we put into tertiary education, wouldn’t that be worth it?Bryan Gould

    4 November 2010
    This article was published in the NZ Herald on 17 November

  • Arise, Sir Robbie

    Arise, Sir Robbie!

    The New Zealand Rugby Union has attracted its fair share of criticism over the years, so we should not begrudge it the plaudits for devising and then implementing a strategy that has been brilliantly successful.

    The outcome of that strategy is there for all to see – nine straight wins against the Wallabies, the Bledisloe Cup in New Zealand hands for an eighth straight year, and the All Blacks encouraged by those successes to approach next year’s World Cup with justifiable confidence and the knowledge that one of their most dangerous rivals is firmly on the back foot.

    While the results may be obvious, the strategy that produced them is not well understood, and nor should it be. Indeed, secrecy and subterfuge were the essential keys to success; but those who devised the scheme could never have foreseen that the secret could have been maintained for so long. It is only now, when the penny is about to drop, that the true story can be told.

    That story began in the immediate aftermath of the terrible disappointment of New Zealand’s failure in the 2007 World Cup in France. Within a week of the end of that tournament, New Zealand’s rugby bosses held a crisis meeting in secret to see what could be rescued from the wreckage and what course could be followed to ensure the right result next time.

    The first issue for resolution was coaching. The team led by Graham Henry was widely seen to have failed, and there was considerable pressure to move quickly to appoint a new coach. The call for a new appointment was of course greatly strengthened by the evident availability of a well-qualified replacement.

    The strategists were initially tempted to make a clean break and start the 2011 World Cup campaign with a fresh coaching team. There was of course some reluctance to ditch Graham Henry and his colleagues, whose record – apart from the 2007 defeat to France – had been impressive. There was a strong belief that they might still deliver the World Cup victory that the country craved.

    It was at this point, as they wrestled with the complexities of what to do next, that the outline of a daring plan was conceived. It is not clear who first had the idea – an idea so outrageous that it was at first dismissed out of hand.

    But, as the rugby bosses thought more about the plight they were in, the conviction grew that something extraordinary was needed, and that there was a chance – a slim chance – that the more unthinkable the plan, the better the chance of success.

    They realised that the first task would be to hoodwink the man whom many regard as the sharpest operator in rugby – the Australian rugby supremo, John O’Neill, the man who singlehandedly out-manoeuvred the NZRU and walked away with sole rights to the 2003 Rugby World Cup tournament. If they could suck him in to the plan, the rest would become so much easier.

    What was needed, of course, was the right man for the job. And, as luck would have it, the answer was at hand. The very man whose credentials made him a real contender for the All Blacks coaching role, and whose candidature accordingly created a real dilemma for the NZRU, was the one person who might have a chance of pulling off the coup.

    So, a top-level deputation was sent to Christchurch. They talked far into the night. There was, of course, an initial disbelief and outright rejection, then a reluctant consideration of the chances of success, and finally – in the early hours – a simple handshake. The deal was done.

    The rest of course is history. The initial result – a Wallaby win – was agreed upon as the necessary confirmation that the deal would stick. The original expectation was that the plot would be uncovered after five or six Wallaby defeats. Nine All Black victories on the trot, and an unshakeable grip on the Bledisloe Cup, have exceeded all expectations.

    But, it now seems inevitable that, with his keen eye for a conspiracy, Peter de Villiers will bust the plot wide open. And even John O’Neill’s credulity has its limits. By the time he is brought face to face with reality, however, the damage will be irretrievable – at least on any time line that culminates with next year’s World Cup.

    Robbie Deans, finally unmasked, will return home a hero.

    Bryan Gould

    9 August 2010

  • It’s The Economy, Stupid

    A week, as Harold Wilson famously said, is a long time in politics, but the day-to-day ups and downs that hog the headlines rarely determine the outcome of elections. Voters’ preferences are usually shaped over longer periods and reflect underlying perceptions about the competence of governments and the preparedness of oppositions to meet the challenges of running the country.

    Recent reports of government policy reversals or of Labour’s disciplinary problems matter less, in other words, than what is happening over the long term to the issues that really matter – and principal among those, as Bill Clinton’s campaigners declared, is “the economy, stupid”. For as long as the economy is seen to be on the right track, the Prime Minister will retain a good deal of political capital in the bank, and the government will not be too worried by the kind of occasional, short-term difficulty that afflicts all administrations.

    But that scenario could change if, over time, the perception should grow that the economy is heading nowhere. A better economic performance, even if the goal of closing the gap with Australia is now said to be only “aspirational”, is after all at the very core of the government’s agenda. Other disappointments might well be accommodated without difficulty, but an economic policy that was seen to take us down a dead-end would be serious for any government, not least this one.

    That is why the faintest of alarm bells might now be audible in John Key’s office. It is bad enough that the steady recovery from recession now looks as though it might have stalled. The current economic news suggests that, whatever the statistics might show, people are now much less confident that their economic circumstances will improve over the next year or so. And that is exactly the kind of perception that can have a big influence over election outcomes.

    What will worry the government even more is that they seem to have few weapons left to try to improve matters. Even our relatively benign experience of recession over the past couple of years is now seen as owing more to the buoyancy of our major export markets in China and Australia than to any initiatives taken by the government. And, as those markets falter, the heat will turn up on the government to find its own way forward.

    The trouble is that they have already fired what seem to be their best shots, to little avail. The jobs summit produced little. The priority to getting the government deficit down is said to preclude any further stimulus to demand and economic activity. The welcome focus on funding for research will take some time to bear fruit.

    In the meantime, almost all of measures they have turned to have failed to carry conviction. They have either been tried before without achieving much or have provoked such opposition that they have been abandoned before they even got started.

    So, removing “labour market rigidities” through amending employment law in favour of employers is a favourite nostrum of neo-liberal ideologues but has stubbornly failed to produce any benefits to productivity or growth when it has been tried before. Pressing on with the free trade agenda looks and sounds good but – in a country which has given it a more extended trial than almost anywhere else – has resulted over a couple of decades in a more rapid growth in imports than in exports.

    The move to attract foreign capital by increasing our willingness to sell even more assets into foreign ownership seems to have stalled in the face of the Prime Minister’s recognition of the political risks involved. The attempt to transform our tiny financial institutions into world players in capital markets seems unlikely to get off the ground. And the latitude planned for international mining companies to prospect in prime conservation land quickly flew in the face of environment sensitivities.

    The danger for the government is that these abortive steps will be seen not just as failures but as having been ideologically driven – reflecting the belief that economic salvation lies in tilting the balance in favour of employers – rather than directed at solving real economic problems. And that problem will be compounded as we seem to be preparing yet another re-run of measures – high interest rates and an over-valued dollar – that have already been seen to make the problems worse rather than better.

    John Key has so far shown a sure political touch. He will know that perceptions about the government’s ability or otherwise to kick-start our economy will be critical to his chances of re-election. Stand by – if we are lucky – for an “agonising re-appraisal” of economic policy.

    Bryan Gould

    1 August 2010