The last time New Zealand thought Big - Chapter 1 of Michael Parker's book about why New Zealand needs a great university

The last time New Zealand thought Big - Chapter 1 of Michael Parker's book about why New Zealand needs a great university

By Michael Parker*

[This is Chapter 1 of the book, The Pine Tree Paradox. The Introduction was previously published here » ]

Thinking big is not, by definition, a bad idea.

It just seems dangerous and outdated, given our conflicted history with large-scale projects and top-down, government planning.

If we want to create the kind of future that we endlessly talk about for our country, we have to dare to think big again.

In 1979, New Zealand Prime Minister Robert Muldoon - in a response to a crumbling national economy brought about by decades of over-reliance on primary product exports and exacerbated by high debt levels and high oil prices - embarked upon a series of infrastructure and other initiatives to reduce oil consumption, increase energy independence and provide a fiscal stimulus to the country. These infrastructure initiatives came to be known as “Think Big”.

Many of the initiatives devised in the name of energy conservation are comical from our perspective 30 years on. For example, a law was introduced banning the sale of petrol at the weekend. This legislation was effective in reducing the petrol consumption of motorists lacking the presence of mind to fill up the tank on a Friday afternoon.

However, not all the energy initiatives introduced by Muldoon were as temporary or as benign. The infrastructure programmes introduced by the Muldoon Government as part of Think Big were wide-ranging and remain ingrained within our political and economic consciousness today.

Projects undertaken as part of Think Big included a synthetic petrol plant at Motunui in Taranaki, expansion of the Marsden Point Oil Refinery in Northland, a methanol plant at Waitara in Taranaki and the Clyde Dam on the Clutha River in Central Otago.

In total, the cost of the Think Big projects has been estimated at approximately $8 billion (in current dollars, the figure is far larger)4. These developments were funded largely through an increase in foreign debt.

The projects were planned based on the assumption that a barrel of oil was likely to cost as much as US$60-70 over the production period.

By 1986, the price of a barrel of oil had fallen to US$8.505. No comprehensive economic analysis of the impact of the Think Big projects has ever been performed.

However, from this distance, far more important than the actual financial performance is how they are remembered.

And they are remembered with disdain: a series of projects that ran up the public debt as a result of the government gambling on global economic trends and long-term commodity prices – and losing.

The received wisdom from Think Big for New Zealand politicians has been: don’t undertake large-scale, long-term projects and don’t “pick winners”. Instead, let the market decide.

The emergence of New Right economic policies into mainstream economic orthodoxy has encouraged this approach. And New Zealand governments have dutifully followed this lesson. With few exceptions, our governments simply don’t do large-scale.

Prime Minister Jim Bolger was a champion of a national museum in Wellington during the early 1990s, resulting in what is today a fairly modest institution by international standards. New Zealand will host the Rugby World Cup in 2011 and the government is assisting in financing the renovation of Eden Park to the tune of $190 million in order to accommodate the crowds for the semi-finals and final6. Other than that, infrastructure expenditures are made at the increment and only on a truly as-required basis.

Of course, there is a fundamental problem with the lesson that the government should not make large, long-term investments in New Zealand. If the government doesn’t do it, then who will?

Thinking Bigger

Let’s try a counter-factual.

What if, in 1979, as Robert Muldoon and Bill Birch, the Minister of Energy, sat down to address the economic issues that were facing the country, they were able to do it with perfect foresight of what the next 30 years would bring? In other words, what if we - from 2010 - were able to sit down with Muldoon and Birch at those meetings in the Beehive in the late 1970s?

We could explain that OPEC would be unable to sustain low production targets through the 1980s given the decade-long war between two cartel members - Iran and Iraq - that was about to begin and that oil prices would therefore ease. We could explain that the Soviet invasion of Afghanistan was a fatal strategic blunder for the U.S.S.R., not the long-term threat to Middle Eastern oil supplies that it appeared, and that the Berlin Wall would fall within ten years.

Further, we could explain that the long bull market that the U.S. economy was about to enter would last right through to 2007 and that the then-radical New Right economic policies would become the Washington Consensus, adopted in almost every developing and developed nation on earth.

We could explain the rise of the Asian Tigers during the 1990s, the Celtic Tiger in the 2000s, the Euro, the Internet, the opening of the Chinese and Indian economies, Islamic terrorism, global warming, and the asset boom that ended with the global financial crisis of 2008 and 2009. And we could explain that, during this entire traumatic time, one of the few constants anywhere in the world was that growth in demand for New Zealand primary products would remain pretty low.

Now, what would a New Zealand government do to try to prepare its citizens to prosper in a world where dramatic and completely unpredictable events occur with such regularity? The answer, I am pretty sure, would not be: build a really big dam.

The best possible answer that Rob Muldoon and Bill Birch could have devised in 1979 to prepare New Zealand for the next 30 years would have been to focus not on energy infrastructure but on the human capital of the New Zealand people.

Think Big should not have been about energy; it should have been about us.

The focus should have been how to ensure that we, as a people, would thrive during periods of great change and how to create an environment in New Zealand where we nurture and “export” ideas along with dairy, lamb and timber.

Of course, today, this is political orthodoxy: we must create innovations at home and “lead the world”.

However, in a post Think Big environment in a New Right world, it is also political orthodoxy that governments should support these policies but only at the margin, in a piecemeal fashion: a tax credit here, a government grant there and, every once in a while, an international conference on innovation. It is not, let’s remember, government’s job to be picking winners or committing to bold, discretionary long-term capital expenditures. That is for the market.

From the Grave…

However, from the grave, Muldoon whispers to us: if we really want to build up the human capital of New Zealanders, if we really want New Zealanders to become world-class innovators, to thrive in chaos, to embrace the new and - more importantly - to make New Zealand a great place to study, to work and to invest, the answer is very simple: don’t hold a symposium, build a university.

And don’t just build any university.

Build the world’s best university. Build libraries that are modern cathedrals of learning, research facilities that are palaces of innovation and lecture halls that crackle with ideas. Build departments brimming with the brightest and most promising PhDs. And build these world-class facilities in engineering and in anthropology, in biochemistry and in sociology, in medicine and in classical studies - because no one can predict where new global demand and opportunity will arise. Allow foreigners to enrol (for a price) so that New Zealanders can be tested against and inspired by the best in the world.

Had Muldoon set off on this course of action in 1979, in the worst-case scenario, we would today have the beginnings of a truly great international university in New Zealand.

The best-case scenario is that we would have in New Zealand not just a university, but an entire system of research and development centres, start-up companies, venture-capital firms and creative enterprises that both feed off and into the university, driving and being driven by New Zealand innovation and creativity.

The model here is the Bay Area in Northern California with the University of California Berkeley to the north and Stanford University to the south, buttressing a region of innovation, creativity and growth that relies as much on the beauty of the land and the Northern California lifestyle as it does on the institutions and companies that are based there.

If only Muldoon and Birch had seen all this in 1979. But, alas, the moment has passed.

Or has it?

Today we sit in a remarkably similar position to where Muldoon and Birch sat 30 years ago. New Zealand is emerging from an economic downturn brought about, in part, by decades of over-reliance on primary product exports and exacerbated by high debt levels and high oil prices.

And we know what the future holds: more of the same.

We know that the next 30 years are entirely unpredictable and that the best thing we can do to build the future every New Zealander talks about wanting for this country is to enhance the human capital of New Zealanders and make New Zealand a magnet for innovation and creativity. If this was a good idea 30 years ago, it is a good idea now.

Am I really proposing that we channel the spirit of Sir Robert Muldoon and seek his counsel on issues of New Zealand economic development? Of course not. Muldoon was an anachronism even in 1984. He has little to teach us today.

I am suggesting that building our economy around innovation rather than agriculture, and anchoring the economy with a world-class research university, is a step so obvious that it can achieve broad-based political support in New Zealand. My point is that even Muldoon would have to agree with it.

The problem is not conceptual - it is financial.

This endeavour will be astronomically expensive. And it will take longer than anyone involved in the process will want to acknowledge.

As a rough comparison, Harvard’s endowment - which funds part of its operating budget and most of its capital programme - is approximately US$26 billion; we start with nothing. The time required to make real progress on this enterprise should be measured in decades - and it may never be truly completed.

The government can only provide limited assistance. We cannot wind back the clock and return to the age of Robert Muldoon or Joseph Vogel where the state fulfils every national need. Nor would such a public investment work.

The New Zealand government - or any government - can justify subsidising a good university system. But, unless it is fighting a Cold War, government is not in the business of building great universities. There are simply too many other claims on government funds for the government to build a great, international research university, brick-by-brick. We need private sector funding to build something on this scale.

There are no wealthy industrialists - no Carnegies or Stanfords or Vanderbilts - in New Zealand who might simply create the necessary endowment.

That leaves you and me. This book is about how we do it.

----------------------------------------------------

4. Gustafson, Barry, "His Way: A biography of Robert Muldoon", Auckland University Press, page 287

5. Gustafson, Barry, "His Way: A biography of Robert Muldoon", Auckland University Press, page 279

6. New Zealand Herald, 13 December 2008 "Rugby World Cup: Government in, boots and all"

----------------------------------------------------

This is the sixth part of a serialisation of the book, The Pine Tree Paradox. It will be published online here in eleven parts.
The Introduction is here »
Chapter 1 is here »
Chapter 2 is here »
Chapter 3 is here »
Chapter 4 is here »
Chapter 5 is here »
Chapter 6 is here »
Chapter 7 is here »

If you would like to buy a copy of the full book, you can do so by credit card here » (Visa or Mastercard only.)

----------------------------------------------------

Michael Parker is an equity analyst living in Hong Kong. Originally from Wellington, he has spent the last decade in San Francisco, New York and - on good days - Waiheke. He has a law degree and bachelor of commerce from the University of Otago and an MBA from NYU. You can contact him here »

Used with permission. © Michael Parker. This book was originally published in 2010.

---------------------------------------------------

To subscribe to our weekly business newsletter, enter your email address here.

Email:  

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

3 Comments

Nice idea but how about deciding to live within our means, run a balanced current account, no public debt and look for energy sufficiency :-)

The book is obsolete....have a nice day.
"The projects were planned based on the assumption that a barrel of oil was likely to cost as much as US$60-70 over the production period." Which is our future....though an average of $85+ seems more likely (marginal cost is that and more). Interesting that Muldoon may yet be proved as somewhat visionary....and very Keynesian.......today we have 65%, 70%? hydro....it will save our bacon I suspect....
"Think Big should not have been about energy; it should have been about us."
Partially right but mostly wrong ....under-pinning us and a great university is an economy to support it....no energy, no economy.....period, please get your head around it.
Behind energy however is indeed education...it is vital but also avoiding debt to do it....debt after all is the future call on work/energy........
We will find that as the abundance of fossil energy disappears we will indeed have to focus on core needs....triage will be the name of the game....what do we need as essential and what energy will there be....do these match up?  if not something "essential" has to go...I fear unfortunately that education will be one of the ones to go...which will have a negative feedback.....Why? because tertiary is debt funded now as the BBs wont pay for it, they want flashy houses, big cars and nice holidays....and soon lots of healthcare.........guess how they will vote?
So shortly (<5 years) it will dawn on "us" that we have to do more Muldoon's....tidal farms, geo-thermal.....and paying for it will be interesting....and that isnt transport fuel....that is even harder.
regards

FYI from a reader via Email: Interesting thoughts.
The underlying problem in NZ is low productivity  -  its not the lack
of resources or inputs like skills etc, its how we put those inputs
together  -  multi-factor productivity.

NZIER did an interesting comparative study last year which highlighted this.
http://nzier.org.nz/publications/industry-productivity-and-the-australia-new-zealand-income-gap-nzier-working-paper-2011

We also have good research that links better management practices with
better  firm performance
Practice Makes Profit: Business Practices and Firm Success
http://www.med.govt.nz/about-us/publications/publications-by-topic/occasional-papers/2006/06-01-pdf/view

HR Practices and Firm Performance: What Matters and Who Does It?
http://www.med.govt.nz/about-us/publications/publications-by-topic/occasional-papers/2007/07-02-pdf/view

Management Matters in New Zealand: How Does Manufacturing Measure Up?
http://www.med.govt.nz/about-us/publications/publications-by-topic/occasional-papers/2011-occasional-papers/11-03-pdf/view

Massey University SME Centre has done a lot of research that shows
that most SME managers learn 'on-the-job', reacting to issues and
situations, and they learn from their peers and other businesses.

MYOB research showed that something like 40% of SMEs were using their
bank account to manage their cash-flow, which is not great for keeping
an eye on what is outstanding and what's coming up.  Their research is
also showing that those firms with an on-line presence are performing
much better.
http://myob.co.nz/myob/backing-kiwi-business/myob-business-monitor-1257829565839

The issue is -  how do we get better management system into a lot of SMEs in NZ?

More intense competition? OECD calls it the NZ Paradox, even with best
practices policies, we are still an underperforming.

Provide better information to owner/managers?   MAssey research show
that even when business owner/managers know the benefits of things
succession planning or busienss continuity planning, very few SME
owner/managers do it.

Transaction cost? -  there are lots of on-line free or low-cost
business management tools   -  see www.business.govt.nz

I think there are some good examples in NZ of peak business
organisations getting better management systems into their suppliers
or sectors.  For example;
-   Fonterra and www.fencepost.co.nz, giving farmers and Fonterra real
time management information;
-   MYOB has just launched a free service for a couple years to get
firms on-line and improving their  presence on-line (so MYOB have more
successful clients in future)
-   www.XERO.com online accounting service provides managers real time
management systems
-   www.Sonar6.co.nz provides easy to use online HR performance
management systems (I think Sonar6 has just been sold to an American
company).

I think we need a concerted effort, lead by peak business
organisations,  to achieve ongoing improvement in NZ SMEs management
systems.   This, I think, will improve the productivity of NZ firms,
industries, and ultimately the NZ economy.

Only a small minority of NZ firms will be high growth, exporting
firms, but we need the rest to be efficient as they contribute to the
overall productivity of the economy, and they will be supporting
innovative, high growth, exporting companies, who need efficient firms
around them.