For the 131st AGM of the New Zealand Manufacturers and Exporters Association, 13 September, 2001 in Christchurch. (Revised)

Keywords: Business & Finance; Globalisation and Trade; Growth & Innovation;

This presentation takes place barely a week after the Great Canterbury Earthquake. It is a tribute to the fortitude of those who are here and their ancestors who put in so much robust infrastructure and buildings, that the AGM can take place. I join with all New Zealanders in solidarity with the Cantabrians under emotional and financial stress; even more so because I am a Christchurch boy; I call this place my Turangawaewae.

It is times like this that an economist feels ineffective – there are many other researchers and social engineers who are better placed to help. Economics thinks best about the medium and long run, and your immediate needs are more urgent. So what I want to do this evening is lift your sights above the rubble and distress and talk about a longer vision for Canterbury. It has been wonderful how the Canterbury community has shown so much solidarity, and the rest of New Zealand has supported you too. I hope your recovery involves new buildings with the grace and elegance of those that have had to be demolished. But your vision must also include a thriving economy.

Christchurch is at the centre of one of New Zealand’s major hinterlands whose land intensification and tourist expansion makes the city a major gateway. What I want to suggest though, that as ambitious as this vision is, it is not enough. Christchurch should not be just a gateway city; its ambition should be as global a city as its population size allows.

What characterises a global city is that a solid component of its economy could be anywhere in the world but for a number of positive reasons those businesses are there. This most applies to manufacturing and I am going to concentrate on that tonight. Had I time, I would also talk about the tradeable services sector which is similar to much of manufacturing in that it is footloose and settles in favourable locations – typically in, or in relationship to, a global city.

Not all manufacturing is tradeable – or relocatable. Some enables the local natural resources to be sent outside a region, as when a dairy factory strips the water out of milk. Some manufacturing is necessary to complete processing in order to avoid transport costs, as when a cola syrup is made into a drink by the addition of water, sugar and gas. Between those extremes are many activities whose location is much more flexible – they are critical parts of a global city.

Manufacturers have always realised this. The foundations of this organisation go back 131 years to some coachbuilders and others calling a meeting in Christchurch to demand protection from imports by offshore manufacturers. Manufacturing policy has come along way since then; the demand for protection is not nearly as common today, but the basic message that tradable manufacturing can relocate remains. The question we face is how much – if any – will remain in Christchurch, and what can we do to obtain an answer of either ‘a lot’ or ‘enough’.

The issue of the new industrial assistance policy is, of course, a national challenge. Let me tell you a little of the recent thinking on this topic. First, border protection is not likely to be a viable policy in the near future. The reasons could be elaborated at some length, but there is not a major commitment to return to this strategy, so I skip past the proposal and talk about the alternative.

That strategy basically involves having good infrastructure. Not just physical infrastructure, important as that is (and as shaken as it has been recently), but labour force skills, prospects of technological innovations, and business, financial and legal services. The quality of life of the people also has a critical role in economic development. These concentrate in cities and of course that is where manufacturing – outside resource processing – concentrates too. It is the cities which enable a country to have a viable tradeable manufacturing sector.

This reasoning is why the government has put a lot of effort into Auckland in the last decade. The fact of the matter is that Auckland has an inadequate infrastructure and governance to function properly. Those problems are being addressed although, alas, they are yet to be resolved, and wont be for some time.

Why has the government focussed on Auckland? It was not only because it was the most dysfunctional of all our urban centres. It is also our largest one. Size is critical in the development of manufacturing sectors. This is not just economies of scale in a factory, but it is also what we call the economies of agglomeration between businesses, that is, the benefits of larger urban centres in delivering those key infrastructural contributors that I have just mentioned.

Let me illustrate this with a study on the biotechnology industry I was involved in a few years ago. I came to the conclusion that the United States does not have a biotechnology industry. Rather about a dozen American cities have them; it hardly exists anywhere else. All those dozen cities are larger than Auckland. A biotechnology industry is not one firm or just a group of firms. It needs universities and polytechs to supply a pool of skilled labour and a quality of life to keep them there; it needs universities and research institutions to supply ideas; it needs a host of businesses, financial and legal services and it needs specialist providers of certain activities, who in turn need a set of firms who will require their services. Some of these firms will be very specialised.

On this basis you might conclude that there is no future for biotechnology in Auckland, nor in New Zealand. But 100 kilometres to the south of Auckland is Hamilton which also has biotechnology aspirations, especially at Ruakura. Medical researchers have long used its sheep and dairy expertise to pursue their Auckland-based research. Add in Hamilton, and Auckland is getting into the range of the smaller American biotech centres.

That got me thinking about what was the relevant area for Auckland. The answer proves to be there are different areas depending on the particular issue. Sometimes it is the CBD, sometimes the boundaries of the super-city, sometimes the ‘golden pyramid’ which includes Hamilton, Rotorua, Tauranga, and Whangarei. And then I came across the finding that very often in manufacturing the area is defined by overnight trucking, which means that for tradeable manufacturing Auckland’s area is almost the whole of the North Island.

Unfortunately Aucklanders are too busy struggling with their problems to look beyond anything but the narrowest of borders. But you can now see why the government was addressing the Auckland dysfunctionality in the interests of New Zealand as a whole. The way I summarise it is that if you retire to Waikickamoocow and have a child in the high finance industry, do you want your grandchildren living in London or in Auckland?

The weakness of this for a New Zealand strategy – Auckland’s self-centred preoccupations aside – is Cook Strait. Aside from that which can be supplied overnight by air, the Mainland is not a part of the Greater Auckland economic region. Does that mean that it will be primarily a resource based economy with no significant tradeable manufacturing sector?

Certainly the destiny of much of the South Island is going to be largely about resources – farm food and fibre, fish, timber, possibly some minerals including oil, energy, tourism. This is not a bad thing given the future world economy as their prices are likely to rise. They will generate manufacturing opportunities in processing and local supply. But is that all? Everywhere?

Now Christchurch provides opportunities which are not available elsewhere in the South Island. I will leave the parochial to list the city’s attributes, but for the economist the key difference is that it is the South’s largest centre, and probably it will grow faster as the hinterland intensifies (providing you dont cock up water policy).

But Christchurch is, at best, only a third of super-Auckland’s size and there are not the same opportunities to incorporate other centres into it, although it needs to be very aware of the potential contribution from Dunedin and Nelson (and perhaps Invercargill). That means there are industries that Christchurch cannot expect to acquire – it is certainly not a startup centre for biotech. On the other hand, the city does seem to have a substantial computer hardware and software industry, which arose out of the University’s decision in the early 1960s to go strong on computers, and the desire of its graduates (and their spouses) to hang around in Christchurch with its quality of life including excellence in schooling and recreational opportunities close to the city.

So how to enhance Christchurch as a city with a vigorous tradeable manufacturing sector and a global role? I have already mentioned many of the factors. but rather than realist them lets emphasise some of the things that can be done.

One which must be on everyone’s mind is the rebuilding of Christchurch. My message is dont do it cheap and nasty and short term. Global cities have a quality of life. By enhancing your quality of life you make yourself more global by attracting global citizens. The cultural life they desire is also critical to promoting the quality of design which is so vital for exporting.

A particular issue is infrastructure. While I sympathise with the Auckland commuter faced with its congested roads – I often suffer them myself – a survey found that the congestion also affected business, since roads are vital for trucking around the city and to the two great gateway ports of the Harbour and the Airport. That changed my view of roading strategy. It is no longer just the trucks causing misery to the commuters; the commuters cause misery to the trucking. We cant get the trucks off the roads, but we can offload commuters by putting them onto public transport. That is why I am a fan for a rail link from the airport to the city centre. – to free up the roads for the trucks, for firms who export and import by air.

Now I dont know enough about the Christchurch infrastructure to give much guidance – the city has a very different shape from Auckland. The one thing I can tell you is not to be complacent. It takes a long time to get infrastructure in place, and even longer to get the full adaptation – perhaps thirty years for people to reconfigure their dwelling locations to make the most of public transport. I am reminded of John Kennedy finding some garden workers knocking off for the day with some seedlings still to be planted. They explained that it would take thirty years for the trees to grow; the president said they should have been planted yesterday.

There is another bit of infrastructure which Aucklanders pay insufficient attention. If it needs a hinterland to flourish it needs connections with its hinterland – to Whangarei, Tauranga, Hamilton, Rotorua and places south. Without it many businesses in the rest of the North Island will be weaker, while Auckland business will not be as able to as easily draw on them.

You may come to a similar conclusion about the South Island. For instance, the routes to Nelson, one of its other growth centres, are inconveniently longer than the potential one through Hamner to Tophouse. Christchurch should not compete with other South Island centres – except at sport – but foster them. A strong Christchurch needs a strong South Island. (And to add in parenthesis, a successful global Christchurch is going to be well connected with the rest of the world.)

What manufacturing industries might develop in a global Christchurch? I have mentioned further processing of local resources and the computer industries. There may be other tertiary spinoff industries for the region – plastics? – while Canterbury is likely to long retain its leadership in heavy engineering. I am guessing there are prospects for farm machinery and environmental equipment and services given the expertise in the region.

There will be others – happenstance can be important. Wellywood arises from the accident that Peter Jackson grew up in Wellington and still wants to live there. You cannot predict such events, but you can make sure that when these opportunities occur, the city and the government support them.

On the other hand dont put a lot of effort into sustaining failing industries. Some businesses decline – that is tough for those in them, but better to wind them down and move the labour and resources to where the growth opportunities are. As hard as the shift is in the short term, they will be grateful that it happened in the medium term.

Do not chase an industry just because it is fashionable. Information management (which is a tradeable service) will largely occur in Wellington because of the government; welcome that, and get onto those industries where you have a natural advantage which you can convert into a competitive advantage. Your tertiary institutions and natural resources are vital here.

There is a debate about a ‘new industrial policy’. (See The Economist, 5 August, 2010) Some of the advocates seem to be no more than tarting up the old industrial policy, which too often supported failure.

I am not sure where a genuine alternative will lead. Most certainly it will be founded on those infrastructural elements I mentioned earlier. We have the Tertiary Education Commission, the Foundation for Research Science and Technology (albeit it under restructuring) and the new (physical) Infrastructure Portfolio concerned with these, plus the supervising Ministry of Economic Development.

New Zealand Trade and Enterprise does not seem to have worked as well as hoped, partly perhaps because it has been overly bureaucratic, partly because it has lacked clarity what it is doing and – I think – been much too prone to the pressures from business which tend to be about the past and rather than the future. Another issue we have yet to grapple properly with is mezzanine financing. (Many of those who were not watching closely, thought that is what the finance industry were into; alas their greater interest was property boom – and bust.)

In any case, dont assume that your regional success is in the central government’s hands. You are going to get special reconstruction assistance because of the earthquake, dont expect special industrial assistance. Every region expects it, with the result the government has to be cautious helping any region. Canterbury has a proud tradition of doing its own thing. Its local intiative wwhich can make the difference.

Dont assume that you can necessarily promote an industry with subsidies. A subsidy for one business is a tax on another. In any case you need the funds for infrastructure. As Canterbury graduate Ernest Rutherford said ‘we dont have much money, so we have to think’. The industries of an affluent global city are based on thinking. Low skilled capital intensive factories will flourish better in poorer countries. If we want to become a poorer country those are the ones we should focus on.

Instead, thinking is at the heart of the sort of affluent global city Christchurch would choose to be. At the moment the focus is on reconstruction of the city; that effort gives you a little time to think about how you might pursue your vision for Christchurch. Sure the earthquake was a shock but the reconstruction provides an opportunity to continue Canterbury’s tradition of respect for its past with an excitement about its future. Turn the shakes into an opportunity.

And for those of us outside Christchurch, let us wish them well in your reconstruction and the implementation of your vision, knowing we can learn from that how to improve our economic performance and the quality of our lives too.