Picking Winners:

To enhance economic growth the government needs to stimulate economic change.
Listener 25 September, 1999.

Keywords: Growth & Innovation;

Those who proposed the early 1990s science sector reforms knew little about scientific research or economics. Just as the innkeeper Procrustes required all guests to fit his beds exactly, commercialisation was imposed on all activities. So the DSIR was replaced with a Ministry for Research Science and Technology for policy advice, a Foundation for funding, and commercially oriented Crown Research Institutes as the state research providers. The ideologically driven reforms soon proved cumbersome and inefficient. They are now being reversed, towards where they it would have been, had pragmatism and commonsense been more prominent in the early 1990s.

Thus the mid-August “knowledge economy” package. It was criticized for being ineffectually small (calling it “bright future” was not a bright idea), but its real importance is a signal of the redirection of economic policy. As Science Minister Maurice Williamson admitted, market forces could not always be left to themselves. The package represents a shift from that theory of growth – that the forces would do it all by themselves – which has been so ineffective over the last 15 years. The government is now into “picking winners” – some sorts of economic activities are more growth enhancing than others, and it reinforces them. (Williamson said his admission might sound like swearing in church. Perhaps it was more like popping into the TAB with the collection.)

As I wrote in my column, View From Abroad: What Do We Know About Economic Growth? (May 22, 1999) economists know little about what drives economic growth. But the little we do know suggests that advances in knowledge are intimately involved. To enhance growth prospects the government needs to stimulate technological change. Much of what it does will be wasted. Every “winner” will not win. The aim is to win enough to pay all the bets. To do so pick fast horses – technology is one of the fastest. Even so, I have some doubts with the current strategy.

First the package is too small. A key component of the knowledge economy is our tertiary institutions. They are desperately underfunded. The University of Auckland has only 72 percent per student of what Sydney University has. Nor will the package do much to encourage firms to increase spending on research and development.

The second caveat is that package is too elitist. Notwithstanding my earlier remark that we should be spending more on tertiary education, we are also going to have to do more for ordinary workers, who are key in the application of new technology. The story is told of a firm complaining to its workers that a new piece of machinery was breaking down too often. Those manning the machine said they had never been trained to run it. That was a management failure, but the story shows how workers’ technological competence is critical. Our elite may be well prepared, but the average New Zealander is not. How else to explain the anti-scientific attitudes evident in the support for some alternative medicines? (How to explain a newspaper being gulled by a public relations campaign to give massive front page coverage to a so-called cancer cure which had not even been tested on humans?) The entire public’s scientific and technological understanding has to be raised.

Third, we know that growth in a small open economy is dependent upon the performance of the tradeable sector, which earns or saves foreign exchange by exporting and substituting for imports. The tradeable economy needs at least as much attention as the knowledge economy, although best to get the two horses in the same harness.

The August “knowledge economy” announcement is yet another backdown from the policies which have led to the past low economic performance. We are at last admitting that the government can enhance economic performance by disciplined interventions which apply across broad sectors (rather than the firm specific interventions of before 1984). But have the horse got enough oats, are the jockeys really committed to winning?

Stable Environment?

Shortly after the knowledge economy package, its presiding minister, Max Bradford, opined that we should focus research in a few elite universities, and let the rest be confined to teaching. An obvious retort is that on current levels of funding there cannot be any internationally elite institution. More fundamentally, bet on horse not the stables they come from. Even internationally top rate universities – the Cambridges and MITs – have weak departments, while some of our polytechs run nationally (even internationally) significant programs. The commitment needs to be to the best, not to a handful of universities.

How might can this be done without heavy handed government intervention? When I was teaching at the University of Sussex in the 1960s, the British government made generous grants to top students to do graduate study in particular programs. The new university already had a world class Institute of Development Studies and Science Policy Research Unit. Our offerings to funded economics students were restricted to development economics and industrial economics. We still had to compete with other universities so the students judged our quality. This arrangement may not work for population-smaller New Zealand, but the principles of tertiary specialisation and graduate student judgement apply here too.