By Scott Yates*
In the last General Election an emphasis was placed on closing the income gap with Australia.
Post global financial crisis in 2008, the world economy has gone through a fragile recovery, and the European debt crisis has continued to introduce uncertainty into future growth.
New Zealand, now three years later, is still facing significant worsening economic, environmental and social challenges.
Based on Australia’s accelerating economic performance, is the 2025 goal still achievable?
It is becoming increasingly difficult. Our economy has under performed.
As a country we continue to spend more than we earn.
For many people the future of New Zealand relies on resource based industries such as agriculture and tourism.
The realities are:
• We cannot accommodate a lot more cows, maybe 10%.
• Tourism has a low GDP benefit per worker employed.
Industries with a high level of productivity are essential to lift living standards in New Zealand.
For example, in 2010 GDP per worker in tourism industries was $35,636; agriculture, forestry, fishing and mining industries contributed $64,004; while the manufacturing industries contributed $66,235 per worker. The relative ratio of the figures is important and which sectors to focus on should be acknowledged.
NZ needs to recognise the importance of niche businesses and which areas to support.
It follows that to encourage growth in the high productive industries, the following six points are critical.
1. Research and Development
New Zealand cannot rely on commodities. R&D activities accelerate the introduction of differentiated products and services. We need to improve existing products by adding value. This requires recognising the importance of development and refinement, more so than research.
There is a difference between RESEARCH and DEVELOPMENT.
My company has products with almost 100% NZ content requiring funding for more DEVELOPMENT which will lead to more exports. But as an exporter we also have to fund tool and dies, modern machinery, stock and market development. The policy must level the playing field and match the conditions and the reality around the protection, acquisition and exploitation of intellectual property available in other countries.
The reintroduction of a R&D tax credit is critical if we believe the 2025 target is achievable.
Otherwise the words are hollow.
New Zealand does have niche products and opportunities able to be further DEVELOPED with encouragement.
2. Depreciation
To increase productivity companies must invest in new technology. This requires the use of working capital and access to loans.
A higher depreciation rate preserves working capital.
It does not reduce tax revenue, it just delays tax payment. Accelerated depreciation rates on productive equipment will increase the overall tax take in both the long and short run. Being more efficient and internationally competitive with modern machinery will increase company profitability and will lead to greater PAYE with increased employment opportunities.
More importantly, more foreign exchange will be earned reducing our external debt.
3. Job Opportunities
It is clear we have many talented Kiwis seeking job opportunities in Australia.
Without support and leadership at governmental level this will continue.
We need policies which encourage SMEs to invest and provide those challenging career opportunities.
My company has developed niche products, competitive manufacturing methods, and even innovative ways to load and unload containers. We would be employing more and doing significantly better in exporting if the business climate was conducive.
4. Market development
New Zealand is an open economy with a small domestic market. Our geographical location disadvantages us with the costs of developing and maintaining markets, as it does too with shipping costs. Market development support should be provided to exporters as most other countries do.
It is naive to think the 2025 target can be reached if we don’t recognise the need to grow and sustain our markets. We are a small isolated market with few barriers for imports. Competition is tough.
5. An affordable loan scheme
Canada, Hong Kong, India, Japan, Korea, Singapore, Thailand, the USA and others have loan schemes to support export businesses. In Australia the Headway Scheme is generous and effective.
Our principal Australian banks are risk averse and reluctant to lend to New Zealand manufacturers and exporters, preferring to lend on non-productive property. This needs to be recognised and remedial support put in place.
The Government could and should actively change this situation. It would be so cost effective for the Government to provide back up guarantees to approved manufacturing and exporting SME’s own Bank.
The cost and risk to the New Zealand taxpayer is almost nil, but the potential benefits are so great.
6. A fraud alert scheme
For the above critical schemes it is simple to implement a well publicised, easy to access fraud alert scheme. Make the penalties tough. One can refer to Australia to see their stance.
To catch up with the rest of the world we require a change in our attitudes.
Changes must be radical not incremental.
The New Zealand Government, whoever it is in the next few weeks, must provide this impetus and leadership.
If the talk is of an export led recovery, let the actions match the rhetoric.
Their policies must create an environment that encourages entrepreneurial activity and supports SME’s who are prepared to take risks.
From small acorns grow great oak trees.
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Scott Yates is the managing director of Cee Gee Industries and an executive member of the NZMEA
For more articles on the policy requirements of the tradable sector before and after the election visit: http://www.changenz.co.nz/.
6 Comments
sorry Scott but with the MMP stupid system any govt that gets elected cant implement any sort of bold programme along the lines of your suggestions.The Greens current polling at 10% gives an indication of how far NZ has shifted to the Left. You wont get radical changes in policy and would be better of in Oz to be honest
I like this article. So much that I want to pick holes in it. Using structural reforms to create incentives to boost productivity makes a lot of sense. However I believe the underlying problem is a cultural/social one. Not a structural one. Based on some common social principals:
- Money is everything
- Sucess is defined as making heaps of money for little effort, in a short period of time.
- People aren't stupid, and will chose the fastest route to success
- For every rich producer there are 1000's of rich bankers, PI's, IT geeks and investors
- People that work in the productive sector are not viewed as rich.
- Getting rich cares nothing about the wider economy.
Even though only the productive sector is capable of creating real wealth, they recieve very little of it. A builder that builds a house would be lucky to make more then the real estate agent that sells it.
The incentive structure in the modern economy is upside down. For people to be attracted to the productive sector this has to change.
Out of the thousands of books about how to get rich 100% mention property, most mention shares, and investing, some talk about starting a business, yet I have not read one that has mentioned production. Books on the economy on the other hand do.
If I was young, ambitious, smart and energetic, the last place I would go to, too get rich would be the productive sector. Unless you can create incentives larger then those offered by the parasitic, Finance, Insurance, Real Estate sector, the productive economy will continue to decline.
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