Presentation to Commerce Nelson’s ‘Innovation Forum 2002′, 26 June.

Keywords: Growth & Innovation

It is indicative of the mood of the country that I have been attending more regional economic seminars in the last year or so, than I did in all of the 1990s. It probably represents both the government encouraging regions to develop themselves, and a sign of growing confidence in the overall economic direction. …

… But whatever the reasons, I have no doubt that the basis of successful regional development is the region collectively taking matters into its own hands in the context of good national policy.

One of the reasons I attend such gatherings is to find out how the regions are doing. I always ask ‘why this region’, Nelson or whomever, ‘should expect to prosper’? In the back of my mind I have the paradox of a government minister of thirty years ago who said his policy was that all regions should grow faster than average. (Perhaps I dont get invited to regions that will grow below average.) When pressed, the region is likely to say something like this.

We will prosper because
– we have a great community;
– it is a super place to live;
– it has a grand climate;
– there are a number of resource based industries which have strong prospects;
– tourism will flourish, so will the retirement industry;
– we have a well educated population and a strong educational sector;
– there are a number of innovative enterprises and research institutions;
– we have community coherence so we can get important things done.

Sound like Nelson? Of course. But it also sounds like every region I visit. We might ask what is special about Nelson, and the answer, which I will return to, is that nothing is special about Nelson – and everything.

Another way of tackling the issue would be to look at the weaknesses of your region. The cold harsh reality would suggest the following list:
– size. It is too small;
– poor location. It distant from its main markets;
– workforce. Poor technical qualifications in its middle and lower ends;
– various infrastructural deficits, including lack of key R&D institutions;
– industries which tend to be slower growing or commodity based (and hence subject to price fluctuations which generates local instability).

Before you get angry, have another look at the list. It is applicable to just about every region. It is even applicable to the New Zealand economy. The strengths and weakness identified for our regions apply to the economy as a whole. Since the single most important influence on the success or otherwise of the Nelson economy will be the success or otherwise of the New Zealand economy, it is worth reviewing the prospects of the national economy.

We have had a tough 35 years. The wool price collapsed at the end of 1966 and never really recovered. The economy, whose export receipts were once third from wool, has had to do a lot of adjustment as a result. Meanwhile the international economy moved on. There is a sense we have been so preoccupied with the adjusting to the external shock of 1966 we have not kept up with those changes.

Today I think we can claim to have finally got some things right.
– the fiscal position is under control, with the government accounts running a surplus and one of the strongest public balance sheets in the world, with as good quality public financial records as anywhere in the world and substantially better than most, and with a tax structure which would be envied by most (even if we are still disputing its levels).
– a price system which conveys meaningful information about the underlying resource usage, although there are still some concerns with the interaction between monetary policy and the exchange rate via interest rates.

These have been hard won gains, although perhaps we should not have taken all of three decades to make them.

Additionally, and more recently, there has been the recognition that while the integrity of the price system as a signalling device must not be compromised, in a number of key economic areas it does not function well. That implies that some intervention may be effective. The areas which the government has paid attention to are in education and the acquisition of skills, and in research and development. It will continue to feel its way, and perhaps also extend these non-price interventions in a limited way to some other areas – such as infrastructure – but always keeping as much as possible of the price mechanism intact.

However, the government has recognised that while these gains provide a necessary foundation for economic progress, more has to be done. The notion here is that the economy has to be ‘transformed’. But a dynamic economy is always transforming itself so what sort of transformation?

The single most crucial issue which faces New Zealand – which has always faced New Zealand – is its engagement with the world economy. In practical terms its survival depends on its ability to obtain and use wisely foreign exchange. I dont have time to go through all the issues, so let me focus on the structural-production issues which impact most on regions.

Historically, international trade was based upon the exchange of quite different things, exampled by Britain selling cloth to Portugal, and buying wine. For most of New Zealand’s history we exported resourced based commodities – notably wool meat and dairy products – to Britain in exchange for complex manufactures. Although neither pastoral products or Britain are as dominant as they were once, as a general rule our export-import relation with every country except Australia is still on this specialist, ‘inter-industry’ basis, of exchanging unlike.

However, quite unexpectedly as far as the economic theory of the time was concerned, the stronger growth in post-war international trade has involved exchanging very similar products. For instance the French buy German cars and the Germans buy French ones. Indeed, it is becoming confusing as to what constitutes national origin. It is said that the Honda sold in America has more US content than the Ford because both car’s components are sourced from all over the world. This new form of international trade is called ‘intra-industry trade’, it makes up about a quarter of all world trade and a higher proportion of trade between countries in the rich world. Any transformation of the New Zealand economy needs to increase its intra-industry trade.

Now I am not saying we should abandon those specialist sectors which have served New Zealand so well in the past. They will continue to have a role in New Zealand, and will continue to expand. What we must expect – or hope – is that trade in the complex products which constitute intra-industry trade will grow faster.

Sometimes we measure the potential intra-industry tradables as ‘elaborately transformed manufactures’ although some of the products we define as farm exports are ‘ETMs’ too. (Consider the pharmaceuticals which Fontera produces from milk.) Moreover, today we recognise that services are an increasingly large component of international global intercourse – not just tourism, but as hetrogeneous a bunch of activities as re-insurance, call centres, education, and the retailing of books through the internet. Perhaps we need also some concept of Elaborately Transformed Services.

The catch about intra-industry trade is that the existing exporter can be displaced by a cheaper, better or more competitive product. Indeed there is a continual process of displacement. Activities move to low cost zones as the technology evolves to use low skilled workers and cheaper transport. Enormous chunks of the textile, clothing and footwear industry have migrated from high paid countries to cheaper Asia for instance. Generally, that is a good thing, insofar as who wants to pay Asian wages to New Zealanders (which protection does by subsidising the industry workers from lower standards of living of those who purchase from the protected industries). There is, of course, a TCF sector left in New Zealand, some of which exports, notably fashionware and carpets. What characterises their success is a level of sophistication of the production process which cannot be reproduced in low cost countries. Therein lies the challenge of the transformation.

As the balance changes between inter-industry trade production and potential intra-industry trade production — from where we have a comparative advantage in natural resources, to where we have a competitive advantage in the production process — the economy gets transformed. In the good old days, when the pastoral sector could earn enough foreign exchange for all of New Zealand’s needs, much of the economy could be shielded from international pressures. Today, with a more diversified tradeable sector reaching deeper into all of the economy, there are few sectors which can be thought of as totally shielded. Those that are not directly exporting or competing against imports are probably providing inputs to those that are.

I have described the transformation as New Zealand increasingly introducing production processes where we have a competitive advantage. The government has used the simpler phrase ‘innovation strategy’. This is an enormous topic, so let me highlight just a few points of particular regional relevance.

At the heart of your region’s concerns is why a production activity will be this region rather than somewhere else. There are lots of possible answers to this, but just importing the capital and technology into the region is not one. For if that is all Region A has to offer, then it can be outbidded by Region B with slightly lower effective wage rates and better location, if not in New Zealand somewhere else in the world. In order to win the new processes your region has to offer something of its own., although the list is long ranging from resource based inputs to that the manager’s family would like to live there.

What does this mean for regional policy? A key issue is that the firms you attract will have a reasonably sophisticated production processes. If they dont, they will go to a lower skilled, lower wage locations, perhaps in Asia. So the quality of your workforce and the quality of your technological environment will be important. There is much more which could be said, but the most important is that effective innovation is a community affair, not a matter of just a scientific elite. Our ability to turn the possibilities of scientific innovation into the practicalities of new and better products depends on the ability of the workers on the shop floor. And that depends upon teachers, librarians and union organisers, and a host of people in the community. Moreover ‘shop floor’ is not just the workshop – antiquated images that term generates. It includes those also involved in the selling, and distributing, and the managing – the entire firm. To put it in cash terms, without a high quality and well managed of the workforce we shant get high wages, because we wont be able to adopt advanced technologies.

Another key element will the infrastructure connecting the business to the rest of the world. That includes the material transport structure, but also the telecommunications links, and the support systems around them. The third factor to be mentioned here is that intangible ‘entrepreneurial zing’. Some regions have a whole self-reinforcing culture of exporting. Others are much more complacent. No one knows how to promote entrepreneurs. Perhaps the trick is not to get unnecessarily in their way. To take a simple case, there is much complaint about the RMA inhibiting business, but we know there is a wide variation of its administration by local authorities throughout the country which means businesses expansions are far more inhibit in some regions than others. I dont know where Nelson ranks. Your aim has to be a low inhibitor, a regime that facilitates environment friendly businesses. .

Because time precludes further detail, let me finish with two pieces of advice. The first is not to be over-ambitious. Dont get overwhelmed by the possibilities of large projects even when they seem technologically very advanced. The future success of Nelson is likely to be about clusters of businesses that do well. I am hesitant to make a prediction of which will succeed, but the sort of thing I have in mind is that export of cut flowers is coming up to $100m a year, not very different from our exports of wine only five years ago. New Zealand flowers have under one percent of the international market, despite our growing them having a comparative advantages in some seasons. Imagine too, if as breeding improves, exporting extends to some of New Zealand natives – pohutukawa and kowhai. There are big gains to be made in small industries like this. Dont overlook them by ‘thinking big’.

My second advice is to be ambitious – ambitious for Nelson and its future. Sure, not all regions will grow faster than average, but if each tries to grow as fast as it can subject, of course, to maintaining its community and environment, then the average will increase. A region can make a difference to its prospects. If it does not strive to, the difference will be an underperformance.

Much of this presentation could be given to any region. From that perspective all regions are the same. On the other hand the general context has to be adapted for the particular circumstances of your region. In that sense all regions are unique. Nelson certainly is. Best wishes with the challenge you face.