Economy like an orchard where seedlings are unlikely to flourish

By JIM EAGLES, Business Herald editor

The New Zealand business scene is rather like an apple orchard full of trees which somehow never grow more than a metre tall.

They do produce fruit but there is not much of it and it is mostly too small to be sold.

As a result the orchard has to rely for its economic survival on a few big old trees, some of which are past their best, and they no longer produce enough fruit to pay for all the goodies the orchard owners have come to expect.

The statistics behind this analogy are clear.

The latest statistics suggest there are 277,965 businesses in this country. An overwhelming 86 per cent, 239,544, had five staff or less. Less than 0.5 per cent of business, just 1307, were big enough to employ more than 100 people.

Of all the businesses in the country only 4 per cent export at all. A mere 151 companies produce 78 per cent of our exports.

New Zealand may be one of the most entrepreneurial countries in the world, as the latest Global Entrepreneurial Monitor has just confirmed, but too few of our thousands of start-ups reach significant size.

That is why the number of companies listed on the Stock Exchange has barely changed in 10 years.

It is why so few businesses develop the resources and expertise needed to really crack the export scene so that we consistently fail to pay our way in the world.

And it is also one of the reasons why the New Zealand economy is falling behind other developed countries so that, for example, we are unable to pay internationally competitive wages to the likes of radiographers, software engineers and rugby players.

The Government, of course, has promised to change all that and get the country climbing up into the top half of the OECD wealth ladder.

Several conferences and seminars, a couple of new advisory boards and councils and countless reports and discussion papers have looked at how that might be done.

But it is difficult to find anyone who seriously believes that the economic strategy which has emerged to date will actually double the rate of growth.

That is not to say it is all bad.

Finance Minister Michael Cullen has been a rock of consistency on fiscal policy.

The Government has done better than expected on the trade front.

Much effort has been put into building closer links between research organisations and business, developing an immigration policy which benefits the economy and working with industry groups in key sectors such as wood processing, textiles and food.

A lolly scramble of grants has been scattered over selected businesses, regional development groups and sector organisations to finance studies or assist with new ventures.

The Venture Investment Fund has been set up to help the country's meagre venture capital resources go a little further.

There is also a huge and sometimes confusing array of programmes designed to assist start-ups and encourage established businesses to expand.

The full list of Government programmes is a long one and includes some which will certainly have a positive effect over time.

But it is dominated by a tendency to opt for easy, flashy responses - such as one-off grants for particular companies or projects - which avoid the need for difficult policy decisions.

That approach flies in the face of general business opinion, which was summed up neatly by entrepreneur Sir Gil Simpson when he proposed a Government Help Act which would prevent any New Zealand government from trying to help his business.

Its risks have been illustrated by the fact that the two flagship ventures, the Ericsson Synergy technology joint venture in Wellington and the Sovereign Yachts development at Hobsonville, have both gone wrong.

The point is that while it is nice for a few individual projects to get special help, it is far more effective for the Government to change the economic environment in a way that makes life easier for all businesses.

But any proposals for fundamental change are usually sidelined by setting up a new advisory body which conducts a longwinded consideration and consultation process - offering the twin benefits of giving an impression of constructive activity while avoiding the need to take difficult decisions - and if any recommendations do eventually emerge they can be safely cherrypicked.

In the meantime the economy has continued to bubble along very nicely, largely because of historically high commodity prices and high levels of inward migration, but there is nothing to suggest that it has actually been transformed.

On the contrary, even the three sectors singled out by the Government for special attention - biotechnology, information and communications technology (ICT) and creative - have been finding the going difficult.

The biotechnology sector has been hamstrung by the restrictions in the Hazardous Substances and Modified Organisms Act and has already seen research work and scientists go offshore as a result.

Embarrassingly, a draft ICT sector task force report has called for more attractive tax rules for investment, tax changes to make it easier for firms to retain key staff by giving them share options and moves to encourage R&D by at least matching the tax rules in other comparable countries.

Even the creative sector has suffered through the tightening of the tax rules which previously helped attract foreign film makers here.

Nor do international comparisons suggest the economy is moving the right way. The latest GEM report identified a 23 per cent drop in entrepreneurial activity since the previous year, well above the global average fall of 2.22 per cent, though nowhere near as severe as Australia's 46 per cent decline.

The World Economic Forum's growth competitiveness index for this year shows New Zealand falling from 10th to 16th, well behind Australia on 7th.

The accompanying Microeconomic Competitiveness Index, developed by Harvard Business School guru Michael Porter, has New Zealand down from 20th spot last year to 22nd this year, while Australia is on 14th.

Perhaps most important of all, the latest productivity figures point to New Zealand continuing to fall behind.

Last year, according to Porter's calculations, GDP per head (adjusted for purchasing power parity) in New Zealand was 78 per cent of the Australian figure and 59 per cent of world leader the United States (and the figures for GDP per hour worked are even worse).

That represents a worsening of the situation five years earlier when New Zealand productivity per person was a slightly less dismal 88 per cent of Australia and 64 per cent of the US.

If our GDP per head is about threequarters that of Australia it is not surprising that we find it hard to afford the pay levels, standard of living and social services enjoyed across the Tasman.

Australia itself is far from being the most efficient economy in the world, but its productivity growth did more than double in the 90s after concern about slow growth prompted a range of reforms.

How was that achieved? A recent paper by Dean Parham, assistant commissioner with the Australian Productivity Commission, a body set up to monitor the progress of the reforms, attempts to answer that question.

Parham concludes that greater involvement in education, upskilling and increased use of ICT did help.

But, he says, "Policy reforms have been the major drivers and enablers. Reforms have enhanced competitive pressure; opened the economy to trade, investment and technology; and allowed greater flexibility to adjust all aspects of production, distribution and marketing."

Unfortunately on most of those fronts New Zealand has actually moved in the opposite direction.

While the Government has made much of cutting some red tape it has, in fact, been far busier adding even more, especially in the workplace. A survey of Auckland Chamber of Commerce members earlier this year found that 85 per cent thought red tape had worsened and only 1 per cent thought it had improved.

The Government has also turned its face against Australia's moves to boost the economy by reducing the tax burden. New Zealand's company tax rate of 33 per cent is now the highest in this part of the world and the gap is growing. Total Government spending in New Zealand is around 40 per cent of GDP compared with 33 per cent in Australia.

Any gardener knows that seedlings are unlikely to flourish if they are choked with weeds, or overshadowed by large unproductive trees which block the sun and soak up most of the fertiliser and water.

Corporate seedlings are not so very different.

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