Task Force report destined for the file-and-forget basket

Press, 23 October 1989, Page 16

Task Force report destined for the file-and-forget basket

Pattrick Smellie, in Wellington, describes how the competitiveness committee missed its brief

Scepticism filled the air at the press conference for the release of Mr Mike Moore’s latest brainchild. The report of the Ministerial Task Force on International Competitiveness had all the hallmarks of yet another tome to file in the bottom drawer and forget. That is a pity. It was a worthwhile idea, and there are elements of the report which the Government should not ignore. But by failing to address its brief property, the Task Force has done little more than produce a bland wish-list at considerable expense. The hoped-for consensus between prominent unionists and businesspeople proved instead a recipe for compromise, allowing both parties to thump their most, predictable tubs in the same report.

Key recommendations such as a targeted devaluation, abandonment of current inflation targets, and the establishment of a Statebacked venture capital bank were old-fashioned and doomed from the start. As Mr Moore pointed out, 10 years ago he could buy 14 Singapore dollars with one New Zealand dollar. Today, one of our dollars buys $1.40 in Singaporean currency.

“Which country has done better?” he asked.

It is extraordinary that after five years of harsh restructuring, and about 15 years of gradual currency debasement, the Task Force could only come up with a lower exchange rate as the key to achieving growth. The Task Force’s chairman, Mr Jim Graham, even suggested there were no circumstances in which the exchange rate could be allowed to strengthen. Yet surely that is the whole purpose of becoming internationally competitive — to strengthen the buying power of the country as a whole. In the long run, the strength of the exchange rate is no more than an expression of economic health.

Even the old complaints of exchange-rate volatility and overshoot are now receding into memory, as the currency has been remarkably stable for almost a year now. The Task Force seemed equally confused on the question of inflation. Announcing that a bit of inflation was O.K. on the same day as a high consumers price index figure was released was more than ironic.

The 3.5 per cent inflation in the September quarter had as much as 1 per cent of non-GST, non-food price rises which should make every producer wary about claims that inflation is beaten.

What the Task Force appeared to be trying to articulate was that the danger of using monetary policy — through high interest rates — as the main weapon against inflation. That is industry’s big fear as the Government moves to give the Reserve

Bank autonomy over monetary policy. This is often misconstrued as making the Reserve Bank responsible for inflation. That is not so. The Government retains that responsibility. But by giving the Reserve Bank discretion over monetary policy the Government is placing on itself a discipline to get other parts of its anti-inflationary policy right. These include the removal of protection against competing imports, labourmarket rigidities, control of Government spending, and tax policy. What industry fears most is that Governments will fail to heed that discipline, resulting in a permanent “screwing down” of business conditions under high interest rates. But here again, the Task Force expressed itself poorly. The Government should first loosen monetary policy, and then take compensating action in other areas, it said. “To the extent that cost pressures emerge, a broader mix of policies will be required to control inflation rather than an excessive or exclusive reliance on monetary policy.

“It could include variations to fiscal policy and to rates of tax, a recognition of the importance of interest rates as a cost item, a focus on increased output to spread overheads, initiatives on training and technology development to improve productivity, and a negotiated incomes policy to balance any moderation of the monetary stance.” From that collection of lobbygroup cliches, the most important element is productivity. Improving productivity is the key to whether New Zealand will be‘come more internationally competitive. Yet the Task Force did not focus on this.

Instead, it raised productivityrelated issues such as the need for new investment, better access to venture capital, management deficiencies, and workforce training as separate areas of concern.

As a visiting Australian academic, Dr Neville Norman, said recently, restructuring with big job losses can deliver immediate productivity gains. Fewer workers can easily be made to produce the same amount of goods as before using existing machinery.

But over longer periods, it is the new investment in capital equipment, and the quality of management decision-making that makes most difference to improving productivity, he said. With the globalisation of the world economy, we are competing with a vast array of different countries, each with different

factors operating in their favour. Some have very cheap labour forces. Japan used to be like that, but has since overtaken the world and now has among the highest material living standards anywhere. Some countries have high-tech industries, usually accompanied by high standards of education. The most advanced are moving more and more into post-indus-trial service industries demanded by affluent, highly educated societies. Most countries also have natural resources of one sort or another which give them natural competitive advantage.

Most in New Zealand’s favour are probably its agricultural base, the Closer Economic Relations agreements with Australia, a relatively skilled workforce, and political stability. Improved economic fundamentals can increasingly be added to this list.

Why, then, did the Task Force find such despondency among the firms it surveyed? According to Mr Graham, some 30 manufacturing firms — all “postRogernomics survivors” — had no intentions for significant new investment. The report found “low morale, uncertainty, and lack of confidence” wherever it went.

“It cannot be simply dismissed as special pleading or discomfort with the deregulated environment,” the Task Force said. “Firms doing well were no different in view.”

Yet, did the Task Force make the mistake of taking a snapshot approach, which failed to see any dynamic improvement in business sentiment? How else can its down-at-mouth tone be squared against the consistently increased optimism recorded in recent National Bank, Reserve Bank and New Zealand Institute of Economic Research business opinion surveys? It is tempting to conclude that some of those surveyed saw the Task Force as a Governmentappointed body it would be worth having a moan to. And if there is really no investment going on, then why have the import figures in the balance of payments figures been rising strongly enough to push New Zealand back into the red with the rest of the world?

The levels are still only around those of four to five years ago, admittedly. But they are on the rise. The most recent import statistics show a remarkably even split between goods for consumption, and goods for investment or production. The Minister of Commerce, Mr Butcher, says there has been substantial retooling throughout New Zealand industry in the last

few years. But since much of it has been small-scale, and often using second-hand equipment, he suggests the Task Force may not have regarded that as “significant” investment. This is not to belittle the fragility of business confidence, given the pounding it has taken since 1984. But it is to suggest that it is investor timidness, and frustration at New Zealand’s slow recovery, which is driving much of the sense of malaise. The Task Force was right to point up the lack of venture capital and Government encouragement to kick new, small businesses into life. “Interviews highlighted that a number of the more successful competitive, small and medium businesses reached their present strength because of the special assistance and incentives they received in their formative years,” the report said. “Chances are that would not happen in New Zealand today. “All other countries recognise the role of new business. If there was a level playing field, New Zealand business would have comparable opportunity,” the report said.

It also found New Zealand bankers were currently so afraid to expose themselves to risk that there was “negligible support” for small business. Yet small business is widely recognised as the source of more than 70 per cent of all the jobs in the economy, and the most likely source of new economic growth. Mr Butcher argues that there is already assistance for any manufacturer at every stage of production, it is just a little scattered at present. Efforts are likely over coming months to improve access to those services through existing Regional Development Council offices, better marketing and some reassessment of where resources are going.

On the venture capital front, the Trade Development Board says it is well into a process of identifying and being the catalyst for the establishment of new, private venture capital funds, probably with international links.

“The first bank to offer a venture capital package at the moment would probably pick up an awful lot of industrial business,” says Mr Butcher. With Australia the biggest market for our manufactured goods, he also argues C.E.R. gives far greater certainty than is often claimed by industry leaders. And given the high import content of most of our manufactured goods, the removal of tariffs has in many cases helped our manufacturers as much as it has hindered them. Only 25 per cent of the pro-

duction costs of manufactured goods need be local for a product to be defined as New Zealand-made, proving the lack of natural competitive advantage in much of our manufacturing, other than food processing. The National Party’s approach is not substantially different from the Government’s. The Opposition spokesman on trade and industry, Mr Philip Burdon, says current funds used in small business assistance would be better deployed under National.

But he is not promising extra money, or new tax, or exportbased incentives. Nor is he keen to see the Government involved in a Development. Finance Cor-poration-style bank again. < “This country simply cannot afford to throw money at its problems the way it did in the past,” said Mr Burdon. National would make tougher use of anti-dumping regulations to protect local producers from cheaper imports. He rightly criticises the Government from causing needless havoc with episodes such as the recent tariff concessions review policy, which left manufacturers uncertain whether a whole new range of tariffs was about to be slapped on their inputs. It would be wrong also to suggest that small business growth is not occurring. The crudest measure — Justice Department records of new company registrations — show an explosion of new company creation from 7249 in the year to March, 1984, to a peak of 16,062 in the March,. 1988, year. This fell back to 12,346 in the year to March, 1989. But Statistics Department figures also show a stronger rise in small business over the last year than for big firms.

The number of businesses employing five or fewer people rose 4.3 per cent to 120,272 in the year to February, 1989, although the numbers employed in such businesses fell by 0.8 per cent to 230,939.

This suggests large numbers of new, sole-operator businesses being established, partly as a result of the large scale redundancies which have occurred in the last two to three years. These people deserve and need the best advice they can get. Many will fail anyway, because such is the nature of small business. But many are the big employers of the future, needing the skills and environment to be allowed to grow. If the Task Force report is to have any legacy, it should be to kick along Government commitment in this area through better use of existing resources, and a more balanced approach to economic management than the current reliance on monetary policy.

Tomorrow: Mr Barry Brill, president of the Manufacturers Federation, puts the case for the