After Neoliberalism: the Growth and Innovation Framework.

Paper for the “After Neoliberalism? New Forms of Governance in Aotearoa New Zealand” Symposium, Auckland University, December 13, 2004. While the author is a member of the Growth and Innovation Advisory Board the views presented in this paper are his own, and are not the official views of the Board and may not reflect the views of the other Board members.

Keywords: Growth & Innovation; Political Economy & History;

The policy clash in the 1980s and the 1990s was more complex than a Left-Right divide. At the very least it was tripartite. One group we might call the ‘conservatives’, many of who were on the Left, who wanted to defend the existing economic and social policies whose beginnings go back to the 1930s – making minor modifications from those which we associate with Muldoon. The concerns of the nostalgic Left has been more about human rights, foreign affairs and redistribution, than about economic policy, the main concern of this paper.

At the other extreme were the who wanted a massive redirection of New Zealand, in terms of where it was going as well as how it should get there. The radicals of the Right are the ‘neoliberals’ of this conference title.

The third group were the modernisers, who respected New Zealand values, but wanted to respond to new circumstances and new technologies to preserve and progress them. They saw the Muldoon era as one of policy stagnation failing to address the modernising pressures. While modernisers have values similar to many of the conservatives of the Left there was little dialogue between the two groups. One is reminded of the nineteenth century tensions between the nostalgic followers of Proudhon who saw the resolution to the effects of industrialisation was a return to the past, and the progressive socialists, including Marx, who were as concerned with the impact of industrialisation but who wanted to harness it for the social good.

The modernisers and the radicals of the Right came to power in 1984, but for various reasons it was the extremists who dominated the policy process. In particular, the lack of dialogue between the conservatives and the modernisers meant they could never get a coalition to resist the radicals. The policies of the radicals were superceded for two reasons. First, they were incompatible with New Zealand values. Second whatever their ideological strength the neoliberals were technically incompetent, and their policies failed to deliver their promises. Instead there was the longest period of stagnation in the postwar era.

Economic policy is now dominated by the modernisers, who lost the battle in the 1980s, but who regrouped to be re-elected in 1999, when the neoliberals failed also to deliver under National in the 1990s. Modernisation tends to be incrementalist, so it is hard to describe intellectual underpinnings without hindsight. We do have a major policy document, Growing an Innovative New Zealand released in February 2002, which describes the Growth and Innovation Framework (or ‘GIF’). Reflecting the lessons learned in the three years, GIF is currently being updated to what is known as ‘GIF II’. Its status is further complicated by the Sustainable Development for New Zealand report which is yet to be integrated with it. Hovering behind is the Growth Culture report, to which I shall return. Before describing the Growth and Innovation and Strategy, which replaced the neoliberalism of the 1980s and 1990s, I need to say some things it is not.

First, it is not the ‘Knowledge Economy’. That was the slogan adopted in 1998 by the Shipley government when it became evident that their previous policies had failed and they needed an excuse for intervention. Keynes’ cautioned that practical men and women are but the slaves on defunct economists and other intellectuals. This was true for the neoliberals of the last two decades, but it also applies to the knowledge economy, and to the academics who use the slogan, without any understanding just how shallow is its underpinning. It is easy to say that economic growth depends upon knowledge, and therefore we should fund academics, but the rhetoric has no analytic content. Growing an Innovative New Zealand uses the ‘knowledge economy’ phrase, but in ways which deepens its meaning, particularly with reference to innovation, which is its key notion.

Nor, second, can the current economic strategy be summarised by the ‘Knowledge Wave’. That was an attempt by a group of Auckland centred business people to redirect economic policy. Its politics has yet to be written up, and its economics may not have been much deeper than the ‘Knowledge Economy’. The strength of the Knowledge Wave was that it facilitated a rapprochement between the Labour Government and business, but it came to grief in February 2004, with its flirtation with neoliberals.

At some stage the Auckland business community seems to have struck on a target of per capita GDP (output) at international prices being in ‘the top half of the OECD’ in 2010. The target seems to have been plucked out of the air, without any systematic assessment, not even observing that last time New Zealand was in the top half was in 1984 just before the neoliberal policies were introduced. For a short period the government was seduced by the slogan, but dropped it because it is practically infeasible. The GIF talks about attaining the goal at some unspecified time in the future, which reduces the target to New Zealand growing faster than the OECD average (something which has actually occurred over the last few years).

Outsiders had trouble evaluating the Knowledge Wave because The Business Herald, Brian Fallows excepted, mixed up its favourable opinion with its reporting, so that the casual observer would have gained the impression that the Knowledge Wave was government policy when it was not. It is pleasing to report that in recent months The Business Herald has returned to orthodox standards of journalism. This lapse indicates how dangerous it is to depend on journalistic sources. The sensible analyst relies upon primary documents. Undoubtedly the key one remains Growing an Innovative New Zealand .

It characterises the Growth and Innovation Framework by the following eight principles:
* A stable macroeconomic framework.
* An open and competitive microeconomy.
* A modern cohesive society.
* A healthy population.
* Sound environmental management.
* A highly skilled population.
* A globally connected economy.
* A solid research and development and innovation framework.

I shall use some to illustrate the opening theme of differences between modernisers, conservatives of the Left and radicals of the Right.

A stable macroeconomic framework: The current policy stance is fiscally conservative, although the widely reported OBERAC – operating balance (excluding re-evaluations and accounting changes) – makes the small effective fiscal surplus appear larger than it is. This may seem to align the modernisers with the neoliberals of the past, although the records of the Reagan and second Bush presidencies suggest that fiscal conservatism may no longer be a neoliberal virtue.

However the government has made it quite clear that when the economy goes into downswing it will manage the fiscal position to ease the contraction. In fact, Keynes did not support unlimited government deficits. He favoured managing the government fiscal position. Today’s policy retains the Keynesian stance, but adapted for the new circumstances of inadequate private domestic savings even during an economic boom.

A fiscally conservative government faces severe restraints on increasing spending or reducing taxation. Typically today’s government has less than an additional billion dollars to spend each year, about half of which goes to education and health services. Conservatives of the Left would like to spend much more – but so would the government, had it the wherewithal. In current policy circumstances this requires higher taxation, but whereas unlike the neoliberals, the modernisers are not adverse to raising taxes, their record is they are cautious about doing so.

An open and competitive microeconomy: Modernisers use the market mechanism to make economic decisions, and so there is much less legal regulation, and fewer barriers to entry and controls than in the pre-1984 era. However they are not ideologically committed to the market and where it is judged appropriate, they will over rule it. Among the many instances, the government:
– has been willing to spend to promote culture and protect the environment;
– has reduced competition in some public provided sectors (such as education and health services);
– has been willing to use public ownership where it judges failure by private corporations, (the creation of PostBank and the renationalisation of Air New Zealand and the Railtrack);
– has tackled the infrastructural network deficit, funded by higher taxes (rather than continuing the neoliberal stasis because they could not work out how to impose private charges).

The difference is that unlike neo-liberals, modernisers see the market as an instrument of economic policy, not an end in itself. Where they judge it fails they use another instrument. Underpinning this approach is the perception that the market is a powerful social technology, and – as William Booth said – ‘Why should the devil have all the best tunes?’

I am not sure that modernisers have thought through the distributional impact of market adjustments, which sometimes damage the interests of the poor. Because of this, conservatives of the Left tend to over-rule all market transactions. Radicals of the Right dont care in principle, although the evidence is their policies aim to manipulate the income and wealth distributions in favour of the rich. While they are not explicit, modernisers seem to accept that individual market decisions will make some people worse off, but that they should be protected by a safety net of the welfare state.

A highly skilled population: While a new principle is evident in the replacement of the Employment Contracts Act by the Employment Relations Act and the report of the Workplace Productivity Group, I like to illustrate it with respect to core education. Today the focus is on improving educational performance by working with teachers, rather than hoping it will happen by putting competitive pressure on schools. The underlying principle is a cooperative relationship between workers and management will lead to greater gains – as the Workplace Productivity Group report demonstrates.

A globally connected economy: This is one of the biggest differences between modernisers and conservatives of the Left. The pre-1984 regime was far more cautious over global connectedness than the current policy stance, even though the Left were once the great internationalists, and remain so in the non-economic area.

Global connectedness is a large topic, and many of the issues have to be worked out. But the Left need not be anti-globalisation, Rather than parallel Proudhonian nostalgia or uncritically promote globalisation as did nineteenth century capitalism, they may, like the progressive socialists of that era, aim to harness globalisation for the common welfare. The Left in the nineteenth century was engaged with economics in a way that those of the late twentieth century have not been.

A solid research and development and innovation framework: ‘Innovation’(and creativity) is key to the government’s thinking about economic growth. Again this is an enormous topic, but it reflects microeconomic analysis illustrated by William Baumol’s The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism in which technological innovation in the firm is at the heart of the growth process. (In contrast the Treasury research program is based on a more macroeconomic paradigm, which hardly seems to contribute to the Growth and Innovation Framework).

Despite the traditional ambivalence of the Left towards capitalist business, modernisers have consciously decided to make an accommodation with capital. This has not been an easy for this government, and the initial approach of some of the peak business organisations did not help. Under the neoliberals, business had the impression that its interests preceded all others. Perhaps this has to be true in a market economy, which is why we have democracy as a second pillar of the macro-regulation of society. Inevitably there is a tension between them. At issue ensuring that business can do what it can do best, but do so in some social interest.

One thing we have learned in the post-war era is that publically owned businesses may be not be better than privately owned ones. This does not mean that – as neoliberals would have it – private business is always best. (The records of privatised Air New Zealand and Transrail give little support to that notion.) The modernisation approach is to treat each case on its pragmatic merits, with a bias towards against disturbing ths status quo, and a tendency to favour private business only in order to make the public regulation of it more transparent. The moderniser priority is the social control of industry not its social ownership. Often that social control is best by leaving the business in a competitive market environment.

The findings of The Growth Culture Report are an enormous challenge to business, indeed to the whole economic debate. It appears the public is not particularly interested in the economic growth as it is normally formulated in the public debate terms of higher GDP. They are not opposed to economic growth per se, but they want a different pattern of growth: ‘quality growth’ rather than ‘quantity growth’. However most of the policies which promote quantity growth apply also to quality growth, although not all of them. In particular their quality growth involves greater public spending (and therefore higher taxation), and more environmental sensitivity.

The traditional Left would have no trouble with such a vision – nor would Baumol. The problem is how to integrate these social objectives with the free market innovative machine, without undermining the latter’s contribution to national welfare. Neoliberals with a narrower vision of social objectives – in effect, quantity growth with the rhetoric of freedom – see no such difficulty.

The government has articulated a vision in which the GIF is embedded. The short version is:
“• A land where diversity is valued and reflected in our national identity
• A great place to live, learn, work and do business
• A birthplace of world-changing people and ideas
• A place where people invest in the future”

with a longer version:
“look[ing] forward to a future in which New Zealanders:
• Celebrate those who succeed in all walks of life and encourage those who fail to try again.
• Are full of optimism and confidence about ourselves, our country, our culture, and our place in the world, and our ability to succeed.
• Are a nation that gains strength from its foundation in the Treaty of Waitangi and in which we work in harmony to achieve our separate and collective goals.
• Are excellent at responding to global opportunities and creating competitive advantage.
• Are rich in well-founded and well-run companies and enterprises characterised by a common sense of purpose and achievement. They are global in outlook, competitive and growing in value.
• Derive considerable value from our natural advantages in terms of resources, climate, human capital, infrastructure and sense of community.
• Cherish our natural environment, are committed to protecting it for future generations and eager to share our achievements in that respect with others.
• Know our individual success contributes to stronger families and communities and that all of us have fair access to education, housing, health care, and fulfilling employment.”

In this selective overview of the elements of GIF I omitted three. The modernisers’ approach to health and a sustainable environment repeats principles already discussed, but the third requires further comment.

A modern cohesive society was also a concern of the previous National government which saw some of their policies tearing the nation apart. The traditional Left has argued that capitalist growth tends to generate rising economic (and social) inequality. On the basis of the evidence, I am not persuaded that increasing inequality is inevitable, although I acknowledge that under the neoliberal policies of the 1980s and 1990s, inequality rose. But that was because they consciously pursued pro-inequality policies.

While this government is concerned with the degree of social inequality and has taken some measures to reduce it (alas not always efficiently), I doubt that it gives the same prioritisation of redistribution as many of its Left wing critics. I’ve not read any ministers directly addressing redistributionism, but my guess is they would be concerned if more redistribution in the short run were to compromise the rest of the GIF. They also seem to give greater priority to the effects of policies which are not direct cash flows – say education, training and upskilling, and job creation. I, for one, look to greater clarification in GIF 2.

This quick overview of the current policy stances shows it is both an alternative to the neoliberal one in terms of objectives and mechanisms, but also to the conservative Left one in terms of mechanisms but not fundamental objectives. As such the GIF is currently the best framework we have in terms of melding New Zealand aspirations with feasible and effective economic policies. The challenge is to improve it – or to offer a coherent and comprehensive alternative.

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