Nordic countries show the way

New Zealand Centre for Political Research

The New Zealand Centre for Political Research is a web-based think tank that takes a research-based approach to public policy matters and encourages the free and open debate of political issues. www.nzcpr.com

Politics is the battleground of ideas and beliefs. Helen Clark’s Labour administration operated on the belief that government is the driver of economic prosperity and social values. By necessity, that involved state intervention in our lives and the burden of high taxes. The spendthrift Clark government was responsible for driving New Zealand into a recession months ahead of the onset of the global economic crisis.

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John Key’s National Party won the 2008 general election on the promise of turning around the country’s declining fortunes. They pledged to guide us through the economic crisis, by protecting the most vulnerable, while building a more productive and competitive economy based on greater investment and higher savings. Fundamentally, they believe that if New Zealand’s regulatory framework is set up well, then individuals will take advantage of the opportunity to create jobs and wealth. That’s a win-win situation, not only for those directly involved in the enterprise, but for the wider community as well as the downstream wealth benefits flow through the economy.

Next year voters will need to consider two questions. Firstly, has National run the country well enough to deserve another three years in office? And secondly, would the opposition do better?

Certainly as it stands now, New Zealand’s economic outlook is positive. According to the Organisation for Economic Cooperation and Development, our rate of economic growth is expected to rise from 2.4 percent this year to 3.6 percent by the end of next year, putting New Zealand into the top six of the world’s developed economies – well above the OECD average of 2.4 percent and Australia’s 2.7 percent. The current account deficit, which measures whether the country is spending more than it is earning, is also trending in the right direction and is expected to be less than 4 per cent next year – although it should be remembered that the last time New Zealand earned more than we spent was in 1973!

According to Statistics NZ, in 2012, New Zealand’s exported $46.7 billion worth of goods, with the main returns coming from milk powder, butter, and cheese at $11.6 billion, meat $5.1b, logs and wood $3.1b, crude oil $2b, machinery $1.9b, fruit $1.6b, seafood $1.4b, and wine $1.2b.

In comparison, we imported goods worth $47.5 billion, with petroleum topping the list at $8.4 billion, followed by machinery $6.1b, vehicles $4.9b, electrical equipment $3.9b, textiles $2.1b, plastics $1.7b, medical equipment $1.3b, and iron and steel $1.2b.

National believes that increasing exports is critical to New Zealand’s success, and they have set a goal of increasing the value of exports to 40 percent of GDP by 2025.[1] In the year to March 2013, the total value of exports was 31.4 percent of the country’s $147 billion GDP, a proportion similar to what it was in 2008/2009, when National first came to power. This shows just how difficult it can be to improve economic indicators without major reform.

With 44 per cent of exported goods made up of commodities – milk powder, logs and meat – adding value to these products is the clearly the key. Yet high-value processed food accounted for only 14 percent of the total value of food and beverage exported in 2009 – compared with 30 percent in Denmark and 40 percent in Ireland. If the total mix of food exported from New Zealand more closely resembled our exports to Australia, which consist of a greater proportion of processed foods, the profitability of the whole food industry would be significantly improved.

In New Zealand, private sector spending on research and development, at 0.8 percent of GDP, lags behind other small, advanced economies such as Finland and Denmark, which spent more than 2 percent. To some extent, this explains our lack of innovation. There are exceptions of course – Fisher & Paykel Healthcare spent $45.7 million, or 8.2 percent of its operating revenue, on R&D in its last financial year.

While over the years, many New Zealand companies have done spectacularly well in earning prominence on the world stage – the Warkworth builders of Oracle’s winning America’s Cup catamaran, and cloud accounting software company Xero, are two current examples – a Massey University report shows that less than 20 percent of local New Zealand companies earn any revenue from overseas. The main reason given is the difficulty in committing the time and resources into developing overseas markets. The high New Zealand dollar is also a hurdle, but it is fair to say that many of our most successful exporters compete on quality and innovation, rather than price.

While increasing exports is a key element of National’s business growth agenda, five other areas have been identified: revitalising apprenticeship and skills training; fostering innovation; improving infrastructure; building capital markets; and, with New Zealand ranking eighth in the world for our overall natural capital, better managing our natural resources.

It is a desire to take greater advantage of our abundance of natural resources that’s behind the deep sea oil drilling exploration that is presently underway off the North Island’s west coast. It is however unfortunate that fearmongering by the environmental movement has effectively coloured any sensible discussion about the benefits of expanding New Zealand’s oil and gas industry to produce the type of high value jobs and growth that are the hallmark of the oil-rich Taranaki region.

While the Greens and Labour have attacked almost everything National has done to turn around the economy, others have criticised them for not doing enough!

This week’s NZCPR Guest Commentator is the former Labour Minister of Finance and founder of the ACT Party, Sir Roger Douglas, who believes that John Key has failed to take advantage of a great opportunity for quality reform.

“Why is it that John Key won’t even consider policies that the socialist Nordic countries take for granted? Why shouldn’t New Zealand consider leasing publicly owned hospitals to private sector operators to generate higher productivity and better quality outcomes at a lower average cost? Or in education, why shouldn’t parents be allowed to spend the money – on the school of their choice – that the state currently spends on their children’s schooling?

“When it comes to the overall economy, why not reduce public expenditure and taxes relative to GDP so they are more affordable. And with regard to superannuation, since these Nordic countries have raised the age of eligibility for superannuation to 67 or 68 years, why not follow their lead and lift our retirement age too.

“If New Zealand did these four things – enabled the private sector to engage in the health system, gave parents choice in education, reduced the size of government to more affordable levels, and lifted the age of superannuation – along with real tax and welfare reform – then New Zealand really could lead the world. But not under John Key’s watch, I’m afraid.”

There is no doubt that the Nordic countries have reinvented themselves over the last two decades, and their progress is testimony to the value of proper reform.[2] They faced up to the problems created by governments that had grown too big and entitlement programmes that had grown too generous, to find successful solutions that reduced the size of government and ‘set their entrepreneurs free’. They encompassed the specific demands of their societies, where individual autonomy is valued and almost all women work, and they now lead the world in social mobility. Many believe their innate creativity has helped them to become world leaders in reform, as they successfully coped with three imperatives that forced change – limited resources, rampant globalisation, and growing diversity.

Sweden significantly reduced the size of government, by cutting public spending from 67 percent of GDP in 1993 to 49 percent today. This year company tax is being lowered, from 26.3 percent to 22 percent. In education, a system of universal school vouchers allows private schools to compete with public schools, enabling parents to send their children to their school of choice. New kindergartens and health clinics are being built and funded by the private sector, and private companies can compete for contracts to provide state-funded health care and care for the elderly. Citizens use state funding for their health provider of choice.

Denmark also has a school voucher system that allows parents to send their children to private schools at public expense – with the higher private school fees topped up by the parents. Significant changes have been introduced in welfare – time limits on the unemployment benefit have been halved from four to two years, and the differential between wages and benefits is being increased. As a result of a nation-wide obsession with productivity, the country has become the world’s eighth-biggest food exporter. Their slogan is ‘we sell productivity not products’.

In Finland, teachers are free to design their own curricula and develop their own tests. The realisation that the country’s dependence on the mobile phone maker Nokia, which accounted for 4 percent of the country’s GDP in 2000, was too great, spurred widespread innovation: a shake-up of the universities, schools were asked to promote entrepreneurship, a major venture-capital fund was set up, and business accelerators were established. As a result, the country is now much more market and entrepreneur friendly.

Norway’s mantra is ‘we live off what we find in nature’, and its model is state capitalism – a combination of state control and global capitalism that controls business through owning shares rather than imposing regulation. The government took a long-term strategic view by establishing a sovereign wealth fund – the Government Pension Fund Global (which now accounts for 1 percent of all of the world’s stocks) – to prepare for a post-oil future and to prevent de-industrialisation. The country is the world’s deep-sea oil drilling capital – specialising in leading edge technology, including horizontal drilling and mobile rigs that can be stabilised in rough weather.  They also have the world’s most advanced fish-farming industry.

Nordic countries focus on results rather than ideology, and they are not afraid to abandon policies that don’t work – Denmark axed its option for early-retirement at age 60 (a policy similar to that being promoted in New Zealand by United Future) in favour of increasing the age of retirement from 65 to 67. It also abandoned its Fat Tax – which was introduced to help drive people into better eating habits – because it didn’t work.

Nordic counties have realised that the prosperous future they want lies in having successful companies exporting high value products to the rest of the world – ‘making exports out of local successes’.  And they credit their achievements to four qualities:  a relentless commitment to innovation, always taking a long-term view, a consensus style of management, and a passion for technology. They believe that ‘expanding abroad is how we save jobs at home’, and to this end Nordic governments know that if they are to generate the high-quality jobs that their citizens regard as their birthright, they must keep on producing new generations of successful entrepreneurs and capitalists.

Imagine what New Zealand could achieve if the old-style socialist rhetoric that underpins much of the ideological debate in this country was replaced by a positive Nordic-style approach. With visionary leadership and proper reform, the aspirations of the nation could be permanently lifted!

THIS WEEK’S POLL ASKS:

Are you for or against the proposed expansion of New Zealand’s oil industry?

FOOTNOTES:

1. Christopher Adams, Future NZ: Boosting value of exports key to growth
2. Economist, Special Report: the Nordic countries – the secret of their success

 
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