Listener 18 July, 1998.

Keywords: Globalisation & Trade;

Robert Reich, Clinton’s previous Secretary of Labour, is a living embodiment of his own theories. His The Work of Nations argued that globalization has made it is increasingly hard to say where a particular product is produced, because the various components are made in many different countries. A Japanese marque car may have more American content than an American marque which uses Japanese components. (Either may have New Zealand made wheel hubs.) It is also true for Reich, for his artificial hips come from Germany, and were designed in France.

How is a nation to respond to this globalization? One response can be to prevent people from buying abroad, insisting wherever possible they consume what is produced at home. There are two difficulties. First, a “Made in New Zealand” label is no guarantee that the components were made in New Zealand, or that anything other than the final assembly stage occurred here. But second, we insist on consuming products which can only be made overseas. Foreign tourism is an obvious example.

An alternative response is to accept globalization as inevitable and organize the economy so that it earns enough foreign exchange to pay for those overseas purchases. Such a strategy discourages protecting domestic production for two reasons: we cannot expect other countries to let our exports in while we keep theirs out; and protected industries sometimes (some would say “often”, “usually”, or “always”) inhibit the export sector by raising its costs. The strategy also depends on global investment, not because of any savings shortage, but because assemblers want to be able to control the production processes in a number of countries.

Suppose we seek to be involved in the global economy. (Have we any choice?) That means global businesses have to be encouraged to invest in New Zealand. Why should they? They will want locally sourced raw materials – foodstuffs, fibre, and energy – which can only be obtained by coming here. But that does not generate sufficient jobs. Business has to be attracted to add value to the raw materials, rather than exporting them in an unprocessed state.

Reich identifies two broad strategies. One is to be a cheap processer, in which costs (and hence wages) are low. The Asians have successfully implemented the strategy. That appears to be the current government’s strategy, a continually seeking to cut business costs. Measures have included lowering wages and working conditions, cutting ACC, rebalancing electricity charges in favour of business, and so on. It is ultimately self-defeating, because the low wages, poor working conditions, and a weak social environments will result in able New Zealanders migrating, leaving a country of low productivity workers and elderly people on a superannuation that cannot be afforded.

Reich’s alternative is to offer the international investor a highly competent labour force, to carry out quality and complicated operations. Businesses pay workers high wages because they are high productivity (and so are cheaper than low wage Asians), while workers transfer some of their income to the state to produce a decent society. Developing quality human capital requires state intervention, in education and training activities, and in social welfare.

This “third way”, as Reich describes it, is likely to be politically popular, and we may well see almost all political parties campaigning for it (although some may at the same time want to cut costs at the expense of the development of a quality labour force). But it is also difficult to achieve, as Reich acknowledges. We are likely to have much more energy put into promoting the concept than thinking seriously and systematically about it.