Hard Grind Ahead

Poor economic performance is the consequence of poor economic thinking

Listener 14 January, 2006.

Keywords: Growth & Innovation;

I am even gloomier than the latest report from the New Zealand Institute (NZI), Dancing with the Stars: The International Performance of the New Zealand Economy. Its sobering conclusion is that, compared to the economies we desire to emulate, our global connectedness is near the bottom.

Despite our knowing all this 20 years ago, things have got no better. Admittedly then we did not think much about outward foreign direct investment, which is even worse than our export effort. The NZI’s big revelation – no, the non-revelation because we knew it decades ago – is that our export performance is below par and getting relatively worse. On one measure, we are unique in the OECD because our global connectedness is actually going backwards.

Modern industry is subject to strong, complex and dynamic economies of scale, so a small country cannot produce everything, but has to specialise, doing some things very well, exporting them, and using the proceeds to purchase from overseas what it cannot efficiently produce here. Instead, our export performance is – well – abysmal. While we are exporting about the same proportion of GDP today as we were 20 years ago, the rest of the OECD have markedly lifted their proportion, as one must in a specialising country strategy.

The composition of exports has also hardly changed. One of the NZI report’s tables shows that our top 20 export categories are all land-based. Three quarters were in the top 20 in 1980. (By contrast, we had the most successful export diversification in the OECD between 1965 and 1980.) A comparison with a set of similar-sized economies shows our manufacturing export record is poor. A tabulation of technological intensity of manufacturing exports places us 17th out of 18, ahead only of Iceland. The report does not quote, but could have, that we are at the bottom of rich countries on one of the key measures of a modern sophisticated economy: intra-industry trade, where an economy both imports and exports broadly the same products.

We back slow horses. Some 81 percent by value of our goods exports are in markets that have slower than average growth. Worse, in over half of these slow- growing markets we are losing market share. Only four percent of the exports were in fast-growing markets where we increased market share.

Why have we done so badly? As one who wrote about this all those years ago, my observation is that we have had a wrong account of how an economy functions. Even today, too much of the public rhetoric and analysis assumes that the economy consists of only a single commodity.

Recall Roger Douglas saying in the 1980s that exports were not special. That was because exports hardly appear in the theory of the one-commodity economy. But they are special. It is a bloody sight harder to export than it is to import or sell in secure home markets. If we want to transform the economy – even if the objective is only too keep up with the transformations that are happening to other rich economies – we are going to have to do the hard grind of exporting, and not pretend they are just like the everything else.

The same faulty theory was used in monetary policy. If there is a single commodity, the rate of inflation is defined uniquely. If there are numerous commodities (as in the real world) there a numerous prices, and various measures of inflation, which diverge. A monetary policy based on one commodity can ignore exports, just as Douglas did, and squeeze them by hoisting the exchange rate. When it goes up, export profits go down. It is tough enough exporting normally, but almost impossible if profitability is undermined.

Those locked into today’s conventional wisdom will be baffled by this critique, so totally trapped are they in their narrow (undergraduate) models. We are in a rut of thinking we are a single-commodity economy. We continue to reward those whose research and advice is based on a defunct theory of an economy that was never true, and is not even approximately true. As Keynes remarked, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” As the NZI report shows, we have succeeded in failing conventionally.


The following letter was submitted to, but not published in, “The Listener”


Jeanette Fitzsimmons asks about my column Hard Grind Ahead on the underpinnings of intra-industry trade (Letters: 4 February). I discussed it in columns “Competitive Edges: What the New Wave of Trade Theory Can Teach New Zealand.” (November 1, 2003) and “Choose A Scenario: How Are We Going to Respond to the Doha Round Gains?” (September 25, 2005).

It is vitally important that New Zealand economic thinking does not get trapped into the comparative advantage trade of the nineteenth century, ignoring the development of the rapidly growing competitive advantage trade of the last 50 years.

Brian Easton
Listener Economic Columnist.