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NZCPR
Guest Forum
Opportunities
of a Lifetime:
Lessons for New Zealand from New High-Growth Economies
Stephen
Jennings
Speech, Sir Ronald
Trotter Lecture 2009, 7 April
2009
Printable copy, PDF
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1.0
Introduction
Good
evening ladies and gentlemen. It is a great honour to be given
the opportunity to deliver the Trotter Lecture...
This evening I am going to speak about the accelerating
economic convergence taking place globally as the living
standards of the 5 billion people living outside the
historically rich part of the world rapidly catch up with
income levels in the West. I am going to talk about why this
process will be so transformational and why its essential
nature is often misunderstood.
The
first draft of this speech was prepared before it was clear
that the global economy is enduring the deepest and most
coordinated recession since the 1930s. The crisis is
disorientating in its
power and speed. A wit in Moscow recently asked me: what is
the difference between a Gulfstream business jet and Aeroflot
economy class? In my case, he said, about 3 weeks!
The
crisis makes the concept of accelerating economic convergence
even more relevant now than six months ago. One of the primary
underpinnings of the current turmoil is the enormous excess of
savings in the major emerging markets and oil producing
nations which has effectively financed an equally enormous
excess of consumption in the rich countries of the world. This
imbalance is in part a symptom of both the rapid economic
ascendance of the emerging markets and the relative decline of
the West. I doubt that this is the last crisis that will be
rooted in this historic shift in economic power.
Moreover, emerging markets are likely to converge more rapidly
after the crisis than before. Generally speaking, the rich
countries went into the crisis with bigger fiscal and current
account deficits, lower savings rates, bigger governments and
less flexible labour markets than their emerging market peers.
They
are also experiencing more lethal impairment of their banking
systems than countries with less developed financial
intermediation. In recent years emerging market GDP growth
rates have exceeded those in the rich world by about 5
percentage points; not surprisingly, the IMF expects this
differential to increase in 2009.
To
provide the context for the concept of accelerating economic
convergence it will be helpful to summarise the generally
accepted historical data on the origins and geographic focus
of global growth. What is less well understood is where the
current frontiers of this process lie.
Here
I will draw heavily on my own experience living and working
for the last 17 years in two of the least expected but most
successful economic transformations underway today - those in
the former Soviet Union and sub-Saharan Africa.
Working
as a young policy analyst in Treasury during New Zealand’s
liberalization programme from 1984 I received as rigorous a
grounding in microeconomics as anyone could hope for. But my
experience in the 1980s was grounded in a particular
institutional and historical context, much of which we could
afford to take as given. There was probably even an implicit
assumption that Western-type institutions were in some sense
superior to those in poorer parts of the world.
My
experience working in the former Soviet Union and in
sub-Saharan Africa has changed my views in this regard. I have
seen first hand how economic performance can be dramatically
improved under a wide range of institutions and styles of
government. I have learnt just how difficult it is for
outsiders to understand why particular arrangements have
evolved in particular countries and why they “work” in
those specific circumstances. I have become strongly opposed
to what I term “missionary economics”, the attempt to
preach the unadulterated adoption of institutions and forms of
government that have developed in totally different
historical, economic and social contexts.
But
the most dramatic lesson I have learnt is that we are living
in a world where most low income countries are transforming
themselves in a manner and at a pace that confounds the
economic missionary view of the world. As a businessman I have
seen at very close range how this process has resulted in the
development of highly successful new business models and
concepts.
I
will also touch on the threats and opportunities that a world
of accelerated economic convergence presents for New Zealand.
2.0
The Beginnings of Viral Growth and the Era of Economic
Divergence
In
the second half of the 19th Century, a phenomenon begun 100
years before in Britain was exported out to Europe and,
eventually, the rest of the world. In the 43 years between
1870 and 1913, annual global economic output doubled. The jump
in production was as great as the entire increase seen in the
previous 1000 years of human endeavour. And alongside this
went an increase in population and life expectancy equally as
unprecedented.
Just
as extraordinary is the increased disparity in income across
countries during the same period. In 1000 AD, per capita
income in the richest region in the world, Asia, was maybe 10%
higher than in the poorest region in the world, Western
Europe. In 1870, income levels in the US, then the richest
part of the world, were roughly five times higher than for
somebody living in either Asia or Africa. By 1973, the
difference was 13 times and by 1998 19 times, its greatest
level in history.
2.1
The Causes of Viral Growth and the Importance of Markets and
Private Property in Stimulating Institutional Development
So
what caused this extraordinary increase in the productive
power of one reasonably small part of the world relative both
to anything else seen in history and anything else seen in the
world at that time.
The
early-adopters of the process of economic transformation
shared a common cultural heritage. With very few exceptions,
they were all either European or off-shoots of European
countries. The temptation is therefore to conclude that it is
something inherent in the socio-political traditions of
European nation states that is necessary for a flourishing
market-based economy to transform living standards.
But
here we should be very careful. There were some common
conditions that are crucial – the concept of transferable
and enforceable private property rights for one – but
there are others that were demonstrably not. Only the US was a
democracy which we would recognize today. The rule of law was
only really robust in the UK. There was no free press in
Germany or Japan.
Many
of the socio-political traditions we associate with
marketbased economies could just as easily be argued to have
been the result of economic transformation, rather than the
preconditions for it.
2.1.1
The Case of Russia
We
can begin to think about cause and effect by examining what
was different about this set of countries at that time
compared to others which failed to take off. Richard Pipes, Professor
of History at Harvard, has done a lot of interesting work on
this, specifically comparing Europe’s development with that
of Russia.
Russia
shares a great deal in common with Europe, yet benefited much
less than the other major European powers from the economic
growth of the 19th Century. At one point, it looked as though
Russia might even have been leading the pack towards the
creation of a modern day European state. In the 14th and 15th
Centuries, the principality of Novgorod was the commercial
centre of Russia, bigger economically at the time than its
main rival, the principality of Muscovy.
Novgorod’s
leaders were elected, and held in check by a legislature
formed by a popular assembly. Its wealth was in private hands.
Compared to the feudal systems then common in much of the rest
of Europe, Novgorod’s institutional framework was advanced.
In
his book, ‘Property and Freedom’, the question Professor
Pipes attempts to answer is not which institutional
differences explain why Russia followed a different path to
modernization, but rather what was different about Russia
which explains why it followed a different path of
institutional development.
In
his opinion, it was the weak and late development of private
property in Russia that caused the evolution of a different
set of institutions from those of the rest of Europe. The
reason why parliamentary democracy, civil rights, freedom of
speech and eventually the rule of Law developed first in
England was because of the tradition of property and land
ownership, and the freedom to trade which had existed in
England since the early Middle Ages, and which never managed
to take hold in Russia. Private ownership created the demand
for institutions which protected and facilitated the
transferability of private assets. These included courts,
property registers and written law.
In
Russia, the reason why development stopped in its tracks was
because Novgorod was eventually overrun by the military might
of Muscovy. The Byzantine traditions of a centralized
authority proved stronger than the trading culture developing
in Novgorod.
2.1.2
Viral Growth Occurred even when the Institutional
Preconditions Appeared to be Unfavourable; Viral Growth is
Highly Adaptive
Between
1700 and its peak in 1870, Britain’s share in global GDP
grew from 3% to 10%. The concepts underpinning that rapid
economic growth took a relatively long time to spread through
Western Europe and caught on in some places more rapidly than
others. Social and political resistance to the changes
associated with growth was
understandably fierce.
Rather
than having the ‘right’ set of institutions in place to
kickstart economic transformation, many of the institutions in
place in much of Europe at the end of the 18th Century did not
appear to be particularly welcoming to the transformation
taking place in England. What seems to have catalysed the
economic transformation in the 19th Century was the
demonstration of that transformation.
A
regime needed to adapt its institutional framework in order to
generate the necessary industrial base to keep up with its
international rivals. Success bred success. Although Western
countries today are a relatively homogeneous bunch when it
comes to their institutions, in the 19th Century there were
profound differences. The important similarities
were the recognition of private property, some version of a
rule of law based on the notion of nationhood, and the gradual
acceptance of competition and the market as the best way to
allocate resources.
What
did not drive growth was the government. In fact the principal
impact of government was negative - to slow the process down
through various forms of mercantilism. At the risk of jumping
ahead, this interpretation dovetails with the message
I have heard countless times across numerous African
countries: government hasn’t improved but at least it stays
out of business now”.
Many
of the institutions that we enjoy today were clearly not
preconditions to the economic success of the first wave of
economic transition – they would have looked at least as
alien to Western Europe in 1800 as they do to much of the
developing world today.
3.0
Accelerating Economic Convergence in the 20th
Century and Today
The
economic forces unleashed in the second half of the 19th
Century revolutionized the world. But, remarkably, they were
actually quite muted relative to what we have seen in the
period since the Second World War. Both in size and scope, the
economic change in the last five decades has dwarfed anything
seen before. Global economic growth between 1870 and 1913
averaged 2.1% and increased global output during that period
by 150%. Global economic growth between 1970 and 2013 is
expected to average 3.5% and will increase global output by
340%.
But
perhaps the most under-appreciated fact about the current
period of transformative economic growth is how much more
inclusive it is than anything we have ever seen before.
3.1
Growth Goes Global and Accelerates
Since
the ‘60s, the divergence in growth rates has been reversing.
More and more people living in increasingly varied regimes are
hitching themselves to the locomotive of transformative
economic growth. The number of people involved in the economic
revolution in 1900 was 300 million.
By
1960, it was 2.5 billion. Today, there are 5.5 billion people
living in countries with growth rates higher than the average
in the G7. In the aftermath of World War II, the countries
that powered economic recovery were largely the same as those
that benefited from the
first wave of globalised economic change.
But
then in the early 60s, something remarkable began. Economic
growth began to go truly global. The number and range of
countries experiencing the transformative power of rapid
economic growth began widening and accelerating. It began
quite slowly with Korea in the ‘50s and then the South East
Asian tiger economies in the ‘60s, suggesting that these
were exceptional cases.
But
it did not stop there. Defining strong growth as GDP expanding
by more than 3% on average in every year for a decade or more,
the new entrants to the high growth league in the period from
1980-2005 comprise countries with hugely varied histories,
geographies and cultural and political legacies: Botswana,
Bhutan, Ireland, Singapore, Mauritius, India, Malaysia,
Indonesia, Chile, Sri Lanka and Malta. If we move the start
date up to 1990, the list broadens further to include Vietnam,
Lebanon, Trinidad & Tobago, Laos, Mozambique, Poland,
Guyana and Tunisia. Coming closer still to the present by
starting from 1995, the countries of the former Soviet Union
and former Yugoslavia join the growth league, together with
the likes (or should I say the unlikes?)
of Cambodia, Angola, Greece and Tanzania. Economic
transformation is developing from something which seemed to be
limited in its membership to an elite group of countries
blessed by history and culture, to something which is much
more viral in nature, spreading rapidly across many different
countries with many different cultures and forms of
government.
Moreover,
the rate of
growth is itself increasing. The growth rates during the
Japanese economic miracle were surpassed by the Asian tigers
which were widely interpreted as being a special case. Then
China smashed the Asian growth records, becoming widely
interpreted as a truly unique transformation.
And
in recent years a series of often unexpected countries have
matched Chinese growth rates: Kazakhstan, Angola, Cambodia,
Sierra Leone and Nigeria. There does seem to be an emerging
pattern of later take-off leading to faster convergence.
3.1.1
Viral Growth Prospers in a Wider Range of Political Regimes
and Historical Circumstance
So
what is going on? Why is economic growth taking hold in so
many different types of political and economic regimes
simultaneously? It is tempting to ascribe the success to the
desire of very different countries to emulate the Western
model, in order to be rewarded by economic success.
It
is tempting, but it is also demonstrably not the case.
Singapore, Malaysia, Indonesia, China, the GCC [?],
Kazakhstan, Angola, Azerbaijan and Vietnam have all
experienced more explosive growth than the Western block
pioneered without choosing the Western model of society or
government.
The
only common thread that links most of the countries that have
started to enjoy the benefits of rapid economic growth is that
they have increased the domain of the market in allocating
resources. A combination of allowing markets to set the price
of labour, capital and goods, and a commitment to opening up
to trade and maintaining a degree of fiscal and financial
stability, has been enough to kick-start growth. The only
other common factor all
of these countries share is their diversity.
My
professional experience in Russia in the 1990s challenged and
overturned many of my assumptions about how emerging market
economies and societies work. My first assignment was to
structure and execute the first privatizations in Russia in a
pilot for what became the largest privatisation programme
ever. Our thinking was essentially missionary - if we set up
the right rules ‘they’, the Russians, would behave more
efficiently, and more like us! If we could privatize the
economy there would be massive and rapid improvements in
productivity and efficiency.
Well,
yes and no and the yes for more complex reasons than I
expected. In an environment with no modern history of private
ownership, no supporting values and norms, no established
market institutions and endemic corruption, the initial impact
was chaos. But then
Russia gradually began pulling out of its economic and social
nosedive. Private ownership began to work and to work in an
extremely powerful fashion. As the ownership of collapsing
assets began to be consolidated, investment, modernization and
management upgrading gradually took off. Corporate governance
went from absolutely shocking to average and the global equity
capital markets locked onto Russia. In 2007 Russia had the
third largest issuance market in the world for new equity. The
economy itself has increased 9 times in US dollar terms in the
10 years to 2008.
I
recently re-read the speech made at this forum by Dr Yegor
Gaidar, Russia’s first post-Soviet head of government. Dr
Gaidar introduced the economic polices which have defined
Russia since 1992. Two points in particular resonated with me.
First, the initial market reforms were made when the Sovietera
institutions had collapsed and before any new institutions
could be built. Second, 10 years later when the communists
effectively regained power, they had no option but to push
forward with the reform programme.
The
Russian experience illustrates the general point that economic
transformation can take off even when the institutional
underpinning to the economy is weak and disordered.
Viral economic growth is highly adaptive. Exceptions are the
rule. Preconditions for economic convergence are far more
limited than generally thought.
3.2
The Importance of Openness and Information
At
the same time the world is becoming increasingly open to the
spread of new ideas. In particular, it is becoming
increasingly obvious how other people in the world live, and
that is proving to be a major driving force for contagion of
transformational growth.
In
sub-Saharan Africa a significant cross section of society is
fully aware of the horrific cost of bad government on the
continent and that rapid economic improvement is totally
achievable. There is tremendous and mounting pressure for
reform from these constituencies, and as the benefits of the
first phase of reform and growth begin to flow, those
pressures are both intensifying and broadening.
3.3
Transformational Growth Stimulates Pluralism
In
fact, transformative economic growth is often the major
impetus towards the development of more pluralistic societies,
just as it was in the West. However, increased pluralism does
not mean a move towards a modern Western state. A country’s
institutions will evolve to reflect its unique economic,
social and political situation. The figure who I find is most
revered by African leaders today is not Nelson Mandela, but Lee
Kuan Yew.
Rather
than engaging in carping and paternalistic criticism of high
growth countries with forms of government which differ from
those in the West, Western commentators would do better to
reflect on the fact that what we are witnessing is a replay of
the West’s own success story. In effect, transformational
economics is becoming self-fulfilling; it’s
the rule rather than the exception. The exceptions occur in
extreme regimes, such as North Korea, which stamp out private
sector activity, or anarchic failed states like Somalia. Even,
or should I say especially, in Zimbabwe where I have spent
considerable time, there is enormous domestic pressure for
market-based economics and its well-understood benefits.
The
demonstration effect is extremely powerful and pervasive. This
explains why the further you are behind the faster you will
catch up; it explains why the North Koreas and Ivory Coasts of
this world are increasingly rare – they are the freak shows
of global economics. Once growth starts it tends to continue.
Even the most basic reforms create benefits that broaden the
constituencies supporting further reform. In this sense the
only precondition for commencing transformational growth is
the political will to change, not any specific set of
institutions or policies.
Institutions
and policies develop organically as transformational growth
takes hold; they are the structural building blocks in a
virtuous cycle involving ideas, openness, policies,
institutions, economic benefits and greater pluralism.
3.4
There is Little Predictive Analysis of Transformational Growth
Despite
the overwhelming evidence of accelerating convergence, success
stories are frequently still seen as special cases. These
explanations often have a cultural or historical bent. There
are equally widely accepted theories as to why today’s
laggards will never make it. Unfortunately their predictive
power is virtually nil. In one decade we are told that
Confucianism is a barrier to capitalism; in the next, experts
extol the Chinese work ethic. Lazy, slovenly Russian workers
suddenly become ambitious and creative. India’s colonial
past goes from being a liability to an asset. And of course we
all know why Africans are the world’s perennial
underperformers.
It
is difficult to believe, but in 1960, per capita GDP in China
was less than that of Africa. Before Deng Xiaoping’s Reforms
and Openness programme began in 1978, there was no reason to
believe that communist China was going to grow more quickly
than sub-Saharan Africa, and few commentators expected that it
would. And today, the same negative predictions are being made
for Africa. In 2000, the Economist
magazine had an edition with a front cover showing
a map of Africa and the title, ‘Africa, The Hopeless
Continent’. In the intervening 9 years, three out of the 10
fastest growing countries in the world have been from
sub-Saharan Africa. The region has grown at an average rate of
6%, three times the rate in the G7. And it’s not only
natural resource producers. Ethiopia, a country which was once
synonymous with disaster and aid relief, has been growing at
an average of 10% per annum for the last five years. There is
no reason why Africa cannot go through the same sort of
economic expansion which has so revolutionized life in Asia.
Indeed,
because of the tendency for convergence to happen more rapidly
the later in time it commences, I expect Africa to grow faster
than Asia did at the equivalent stage of its takeoff.
In
business, equally wrong-headed predictions have been made.
When I arrived in Russia, you could buy vouchers which
effectively priced the entire Russian equity market –
including major shareholdings in a third of the world’s gas,
10% of its oil, 12% of its nickel and the second largest
electricity generation company in the world – for 3 billion
USD. Few wanted to touch them. Credit Suisse First Boston’s
elite European bankers had a nickname for our tiny group
camped out in borrowed office space in Moscow. We were called
the ‘smellies’, a reference to sanitary conditions in
Eastern Europe at the time. My principal takeaway from this
was that the incredible business opportunity we had in our
hands would be greatly enhanced by others’ ignorance and the
consequent lack of competition.
4.0
As in Politics, Western Business Models are not Directly
Transferable into High Growth Emerging Markets
As
in politics, Western business concepts are not directly
transferable into high growth emerging markets. The most
successful emerging market businesses have evolved in a manner
that is highly adapted to their local environment.
4.1
Key Aspect of Large, High Growth Markets
There
are three inter-related aspects of large, high growth emerging
markets which have enabled the formation of hugely successful
local businesses that have often proved to be competitively
superior to their multinational counterparts.
These
are:
1)
their highly idiosyncratic nature;
2)
their large scale; and
3)
their extremely rapid pace of change.
4.1.1
The Importance of Idiosyncrasy
It
goes without saying that markets like Kazakhstan, Russia and
Nigeria are highly idiosyncratic. A successful business must
work with existing infrastructure; it must navigate very
specific local product market dynamics; it must manage local
regulatory and legal realities. But think of the challenges
this presents. How do you form a joint venture when the courts
are corrupt? How do you manage risk in a consumer finance
business when there’s no credit bureau? How do you build a
major derivatives business when there’s no relevant
legislation? Imagine how challenging these questions are if
you are a bureaucratic multinational.
4.1.2
The Importance of Size
Market
size is equally important because it creates the potential for
scale. Scale creates the potential to acquire the best
management and technology. If your supermarket business has
two outlets you are unlikely to have the best management or
technology. If you have 100 outlets it will be logical to hire
truly world class management and your technology is likely to
be state-of-the-art, perhaps even leapfrogging that typically
seen in developed markets.
4.1.3
The Importance of Rapid Growth
The
pace of change rounds out the story. In economies growing at
2-3 percent a year, industrial change is relatively gradual.
Explosive change is usually associated with rapid
technological change such as with the IT industry in the
‘80s and ‘90s. In fast-growing emerging markets all
industries are like IT. Market growth and changes in
competitive dynamics are explosive. For Russian retailers or
Nigerian banks, 100% plus growth in revenues or profits is
totally normal. Small businesses can become multi-billion
dollar value enterprises in just a few years. Needless to say,
with these stakes the winners tend to be highly organized and
extremely aggressive.
Now
consider what this combination of idiosyncratic features, size
and speed means when taken together. To be highly successful a
business has to build something very large, very quickly and
of relatively high quality while contending with a very
idiosyncratic environment. In many industries this combination
has proved to be extremely challenging for the world’s large
multinationals. Their advantages in terms of know-how and
capital have been neutralized by their inability or reluctance
to grow explosively in complex, foreign environments. In many
emerging markets and in an increasing number of industries,
the market leaders have local roots.
The
largest metals group in the world is Indian. The largest
aluminium group in the world is Russian. The fastest-growing
mobile businesses in the world are owned and operated in
emerging markets. The fastest-growing and largest banks in
China, Russia and Nigeria are all domestic. Across Africa,
foreign banks with many decades of local presence are being
lapped by the local players. Even in a global industry like
brewing, the world’s two largest players have emerging
market roots.
4.2
Key Adaptations of Successful Emerging Market Businesses
How
have these and hundreds of other enormously successful
emerging market businesses gone from start-ups to very large
scale operations in the face of global competitors with
seemingly vast superiority in terms of capital, management and
know-how?
4.2.1
Ownership
Many
if not most successful emerging market firms are
majority-owned by an individual, a small group of partners or
a family. Highly dynamic, rapidly growing markets demand a
high degree of alignment between management decision making
and economic returns. This is achieved where an entrepreneur
or small group of entrepreneurs has a concentrated economic
interest and the flexibility to make major decisions rapidly.
In jurisdictions with weak legal systems, agreements are much
easier to make on a handshake when you know you are dealing
with ‘the owner of the business’ – an expression I hear
virtually every working day. In my experience a handshake
means a great deal more today in Moscow or Lagos than it does
in London.
4.2.2
Speed and Boldness
Second,
and related to the question of ownership, is the speed and
boldness of decision making. Successful business leaders are
typically able to think on a big canvas; to make bold
decisions and have the resilience to withstand extreme
volatility and market setbacks. It is virtually impossible for
multinationals to operate in this manner. Their key decisions
makers usually live in a distant part of the world; they think
they fully understand the risks but can’t grasp the upside.
4.2.3
Deep Local Platforms
Third,
successful emerging market businesses have what I call deep
local ‘platforms’. They have very broad trust-based
relationships – with customers, suppliers and regulators.
They tend to have a lot of specialized infrastructure and to
be more vertically integrated than their Western counterparts.
These platforms enable the entrepreneur to manage the vagaries
and infrastructure gaps of the local environment in an
effective manner. They also tend to provide resilience in
difficult times.
Critically,
these platforms are 100% local. For all but the most
determined multinationals the need for such platforms
represents an important comparative disadvantage. At
Renaissance we make a huge effort to ensure that our
businesses are owned by the entrepreneurs building them, that
we continue to move boldly and that we build deep local
platforms. Because we operate in several distinct geographies
we try to function as a confederation with highly empowered
local management and without a country or culture-specific
head office.
None
of this is to say that there are not valuable lessons to be
learnt from Western business models and management techniques.
Clearly there are. But successful businesses in new markets
tend to take what’s best and then adapt it to local
circumstances. And with
the ongoing success of emerging market businesses,
multinationals will eventually learn from these achievements
and adapt their own business models more effectively to a
world of accelerating convergence.
5.0
The Threats and Opportunities Accelerated Economic Convergence
Present for New Zealand
This
new world has several important implications for New Zealand
over the next one to two decades. First, global GDP growth is
likely to be high, potentially higher in fact than at any time
in history, notwithstanding the current economic crisis.
Secondly,
the era of Western ascendancy economically and geopolitically
will end as the combination of higher per capita incomes and
large populations propel the major emerging markets into
leadership positions in the global economy.
Thirdly,
the new world middle class will be the largest new market
opportunity ever seen and will present an extraordinary
opportunity for the suppliers of products, services and raw
materials.
Fourthly,
new business models and concepts will continue to evolve to
meet these massive new market opportunities. The winners in
this process will be highly tailored to the new markets, they
will be extremely entrepreneurial and they will typically have
a strong local market focus.
Fifthly,
the greater pace of economic growth and reordering will
probably result in more dramatic structural adjustment, bigger
movements in relative prices of all kinds, more uncertainty
and greater financial volatility and shocks than those to
which the world is
accustomed. How well is
New Zealand positioned for such an environment and what can be
done to improve its positioning?
5.1
How well is New Zealand Positioned Today?
In
terms of how well positioned New Zealand is today, I think the
answer is pretty straightforward: not particularly well.
Please don’t think that this is a throwaway line from
someone who has jumped ship and has developed a touch of
arrogance towards his country of birth. It is not. I care
deeply about this country.
Basically
we are living in a world that is more competitive than in any
other era; where change is faster and less predictable; and
where long-established orders - whether they are economic,
political or industrial – are being challenged and
supplanted. In this world the difference between “success”
and “failure” is greatly magnified. This applies to
specific labour market skills, businesses, industries and
entire countries.
I
don’t need to give this audience chapter and verse on the
dramatic decline in New Zealand’s relative economic
performance over the last 50 years. Let me just remind you
that since 1956 our global ranking in GDP per capita has
fallen from 7th to 27th. Moreover, apart from a relatively
brief period following the Douglas/Richardson
reforms,
when per capita income growth exceeded the OECD average, New
Zealand has been quite consistent in its trend of
underperformance. It is particularly concerning that
productivity growth has fallen away this decade in comparison
with the 1992-2000 post-reform period.
The
staggering number of young New Zealanders who have chosen to
make their careers and increasingly their lives overseas is
the most damning indication of our performance and
attractiveness. And we New Zealanders should stop kidding
ourselves that this is because of our small size and
isolation. Perth is very isolated, so are Iceland and Northern
Finland in their own ways – but their people are not
flooding overseas.
The
choices that New Zealand society made that led to this
situation are relatively clear. They include the incomplete
nature of the liberalisation measures begun in the 1980s,
particularly with regard to labour markets and social welfare;
the relatively large size of government; and the inconsistent
and stop/start nature of reforms over the last 20 years or so.
New
Zealand does have areas of definite economic strength. The
World Bank’s ‘Doing Business’ survey ranks New Zealand
second to Singapore out of 178 countries for “ease of doing
business”. Similarly the World Economic Forum gives New
Zealand very high rankings in several areas including judicial
independence. But this does not alter
the fact of our
long-term economic decline. In looking to address this decline
the question is not where are we doing well but where can we
do much better. My personal assessment is that as a society we
are drifting away from this type of hard-nosed common sense
reasoning; to put it politely we are becoming too inclined to
believe our own myths. We are more likely to move forward if
we talk about why the World Economic Forum ranks New Zealand
51st for burden of government; 67th for the extent and effect
of taxation and 90th for hiring and firing practices. Nor
should we be complacent about our historic strengths. I will
not be at all surprised to see our very strong ranking in
corruption surveys deteriorate, for example.
In
essence, New Zealand society has been sceptical about the
benefits of a free-market, highly open economy. New Zealanders
have been prepared to trade off higher incomes for the
perception of greater stability and reduced exposure to
market-led change. I say perception, because in a world of
viral economic growth, any country that attempts to insulate
itself from the changing global order does so at its peril;
delayed adjustment will more often than not translate into
more painful adjustment.
As
economic convergence broadens and accelerates, the costs of
our current attitudes and policy settings are likely to
increase. Our relative standard of living will decline further
and we will drop down the global league tables as fast-growing
emerging markets leapfrog us. Emigration is likely to
increase, potentially dramatically, while a greater percentage
of overseas New Zealanders will never return to live or work
here. In this scenario we should expect a continued slide in
our relative performance in a wide range of social and
economic indicators including health, education, and sporting
and cultural
achievement. If you are
thinking this is unduly pessimistic, please recognise that
this is not a prediction; it is merely an extrapolation of
current trends. The forces driving this relative decline will
only intensify in the future.
5.2
What can be Done to Improve New Zealand’s Positioning?
What
can be done to improve New Zealand’s performance in a world
of accelerating economic convergence? The answer in my view
is: quite a lot, and with a higher likelihood of success than
most frustrated reformers in this room might expect. Why am I
so hopeful on this score?
First,
New Zealand has a number of key economic strengths in terms of
the framework for success outlined in the earlier part of this
address. We have inherited and evolved efficient high quality
institutions; property rights are generally strong although
there have been egregious recent cases of abuse; and we are
very open to international trade. It is critical that we build
on these strengths.
Secondly,
history shows that the fact that very few of us here tonight
expect New Zealand to become a South Pacific tiger any time
soon has very little predictive relevance. Very few of the
economic success stories I have mentioned this evening were
expected.
Thirdly
there is the question of political leadership at the highest
levels. For the last decade or so, New Zealand’s political
leaders have sought to retain power by placating and balancing
narrow short-term political interest groups through
incremental and relatively minor policy adjustments. It does
seem that New Zealand’s system of mixed member proportional
representation has exacerbated this tendency; incremental
decisions favouring special interests have tended to take
precedent over bold decisions favouring the majority.
We
have lived through a ‘shuffling the deck chairs on the
Titanic’ approach to policy. This style of leadership would
be fine if the world were stagnant; however in a period of
extraordinary change the costs over time of this leadership
style become very large indeed. There are good reasons to
expect this situation to eventually change, not because of
personalities but because of fundamentals. Leading New
Zealanders to embrace a more competitive economic model would
generate substantial economic benefits and, for a skilled
politician, substantial political payoffs.
Fourthly,
there is the question of size and flexibility. In a world of
dramatic change, nimbleness and flexibility are valuable
assets. In my view it is no coincidence that many of the
world’s most successful economies are small – Singapore,
Norway, Finland and Ireland to name a few. We are not highly
flexible and responsive today – but we could become so much
more quickly than many of the world’s largest economies.
Similarly, in business, for reasons I have discussed, in a
world of intensified Schumpeterian creative destruction there
is often scope for small, highly entrepreneurial businesses to
quickly become very large.
This
nation was built by risk-taking explorers and pioneers –
precisely the attributes required in today’s global economy.
Yes, you need to be bold and extremely committed but you can
participate fully in an historically unique
opportunity for value creation. And it’s a heck of a lot
more fun than watching others do it on CNN!
Fifthly,
through sheer good fortune the industrial structure of the New
Zealand economy will probably be quite advantageous during the
era of accelerated global convergence. On current projections
approximately two billion people or around 30% of the
world’s population could join the ranks of the middle class
by 2030. The incremental demand for raw materials to satisfy
the investment and consumption bulge resulting from this
middle-class explosion will likely dwarf all previous
commodity cycles. Accordingly, the era of accelerated economic
convergence is likely to favour countries with a high share of
primary commodities in their exports.
5.3
What Might Prevent Successful Re-Positioning by New Zealand?
The
final question I would like to discuss, and perhaps more
importantly to pose to each of you, is: what might prevent New
Zealand from being a global winner as accelerated economic
convergence takes hold?
To
be successful New Zealand has to recognize that competition is
an unavoidable fact; to think that one can insulate oneself
from it is to engage in dangerous and naive self-deception.
This danger will only increase as global change accelerates. I
think you all remember what happens to All Blacks when they
are put in cotton wool. That’s what we
are doing as a society given the role and extent of
government. I have a feeling that most New Zealanders would
agree with this statement. However, agreement has got to be
translated into action.
We
need to be far more aspirational and to see economic and
business success as something to proud of rather than
something it’s impolite to dwell on. We are culturally
conditioned to ‘not stand out in the crowd’. Many of our
values derive from our small size and geographic isolation and
many of them are wonderful. But cultural cues that lead us to
behave as if we are insulated and somehow safe from the
outside world are likely to be extraordinarily misleading and
dangerous in a world of accelerating economic convergence.
The
second potential barrier to success in my opinion is New
Zealand’s system of proportional representation. Jim Rohwer
in his excellent book ‘Asia Rising’ discusses what he
terms the ‘paralysis of Western democracy by interest
groups’. He puts it very well in my opinion when he says
that ‘social protection is at heart a doctrine of
conservatism: It is about guarding people against the
destructive effects of change, which in practice means
guarding them against change full stop, since the creative and
destructive aspects of it come as a package...Countries with
big, activist governments will be far less able to cope with
the increasing pace of change’. In a world of unprecedented
change and growth, political leaders need to be able to lead
and manage change. They need to be able to make policy choices
quickly and efficiently. We know what kind of political
behaviour our current constitution generates: gradualism,
populism and the quasi-corruption arising from
disproportionate pandering to tiny minorities. New Zealand not
only needs to address future global changes but also catch up
with the policy change that hasn’t occurred for more than 15
years. If we move to a constitution that permits government to
promote a high-performance economy and avoids excessive
capture by narrow interests we will be positioned to become
global winners rather than global has-beens.
To
briefly summarise: the next several decades of accelerated economic convergence will likely see
the fastest growth, most rapid structural change and greatest
economic inclusion in history. For countries and for
businesses the potential for growth and
development will be
unprecedented, but so too will the challenges. As the pace of
change accelerates and global competition intensifies, the gap
between winners and losers will be greatly magnified. With
current social attitudes and policy settings, New Zealand is
poorly positioned to thrive in this new world. Without change
our economic decline of the last 50 years will continue and
potentially accelerate. Nevertheless, there are compelling
reasons to believe that New Zealand can and should be a global
success story; that New Zealand can have a tremendous
resurgence and be recognised as a top global performer. In my
opinion two things need to done to achieve a transformational
outcome for this country. First, mainstream New Zealand must
express and live the values that underpin a competitive,
enterprise-based economy. Secondly, we must move back to a
system of government that gives our democratically elected
leaders the flexibility to promote high economic performance
without excessive pandering to narrow sectoral
interests.
In
my opinion both of these goals are readily achievable.
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