Unusually for small, advanced countries New Zealand remains heavily reliant on agricultural for its living. So is it time to take a bigger punt on technology?
My last item sparked an email from Mike Smith to discuss economic resilience with Brian Easton at a Fabian Society meeting in Wellington on Monday November 10. I made the point to Mike that I don't see the topic as a left/right issue, but have agreed to the discussion. And that's made me to think harder about what it means for New Zealand.
No society is immune from the various economic cycles that pervade the world, but some are less affected than others. It depends on a variety of factors, including sound public policy, economic depth, and having the right products at the right time.
There is a general view that nations that are dependent on commodity sales are more subject to economic currents than more economically diverse societies. Up to a point that seems logical; commodities typically have wider price fluctuations than more sophisticated products. But sound governance would seem to be equally important. One of the lessons from Europe is that government and societal profligacy will imperil a nation; look at Greece, Italy, Spain and France. Some of these nations have strong industrial sectors, but it has not been enough to stave off the effects of all their other problems.
So where does New Zealand stand at the moment? We have been the beneficiaries of an upward swing in the commodities that we produce. But prices are going down. Milk powder is half the price it was a year ago. Mind you, that was a historically extremely high price. I would say we have also benefited from the prudent control on public spending and somewhat more flexible micro-economic reforms of the last five years. But I appreciate that there will be readers who take a different view.
Coming back to the narrow base of the New Zealand economy, we rely heavily on agricultural commodities, which make up about 70% of our physical exports. Of course these are often processed commodities, such as milk powders, and processed foods. Not much is exported as slabs of butter, raw wool or carcasses of meat, as was the case thirty years ago.
The other 30% covers things as diverse as oil exports, and minerals such as gold and coal, aluminium. Around 6% or $4 billion is from manufacturing, such as machinery or electrical goods. There is also the export of services, especially tourism, education, engineering and other consulting, and IT. The latter two areas make up around 3% of exports.
So nearly 10% of New Zealand exports are based on high tech services and high tech manufacturing. That's up a little in the past twenty years from around 8% of total exports. The reality is that the commodity boom of the last two years has seen agriculture retain its export share. Of course any significant slip in agricultural commodity prices will see the high tech sector have a larger share when taken as a percentage.
In virtually all other small advanced economies there has been much deeper diversification. In Denmark these sectors make up 25% of exports, although Danish agricultural exports are still significant at over 20%. Israel, with its own unique characteristics, has 30% exports in the high-tech sector, but 20% is in precious metals and diamonds.
Both countries are notable because they shifted their economies in a very deliberate way towards technology and advanced manufacturing. They have both invested intensively in research and have built deep partnerships between industry, technological centres and university research. This took government leadership and investment.
New Zealand is attempting to learn the lessons of building diversity. Callaghan Innovation is a product of that. I should add a disclaimer here; Callaghan was my main manifesto commitment for 2011 in my final year as Minister of Science and Innovation.
In 2012 New Zealand hosted a meeting, organised by Sir Peter Gluckman, of economic leaders from Ireland, Finland, Denmark, Israel and Singapore, with a focus on R&D. It is clear that we are the laggards. There has been a significant improvement over the last decade, but we are still at 1.3%. Everyone else is higher, with Ireland at 1.8%, Denmark at 3% and Israel at over 4%. Most of this is firm led, but the education and government sector is also higher for all these countries.
So do we take a big punt? Increase our university and Callaghan spend and hope that it will serendipitously result in more high tech firms, as appears to have been the case in the other countries?
And what would such a punt look like? In my view an extra $500 million, split between the universities and Callaghan Innovation, would make quite a difference. It's not a huge wager, but is significant compared to our past efforts. The government currently spends around $600 million, and the universities around $800 million, so an extra $500 million is an increase of 30%.
To focus on Callaghan Innovation, the annual spend in the various firm-facing grants is around $140 million, increasing to around $180 million in a couple of years. The main funding comes from the Growth Grant, which goes to high tech firms with a proven track record, taking around $80 million. The grant is 20% of the firms R&D spend.
The balance of the grant money is for a variety of start-ups and special projects. Increasing government spending in business-facing science to $300 million would take $120 million out of the proposed increase of $500 million. The balance of $380 million would go to universities and CRI’s, specifically for research and for graduate students and researchers. That could go a long way to helping our universities arrest their slide in the world rankings.
With $300 million, instead of the current $140 million, Callaghan Innovation could increase the grant ratio to 30%and could double the number of qualifying firms. This would surely make a difference to the levels of innovation in New Zealand firms.
It will reinforce our image as a “go-to” country for smart thinking.