Paul Conway argues innovation and new policy thinking are required if New Zealand's to emerge from the COVID crisis with a more productive, sustainable and inclusive economy

Paul Conway argues innovation and new policy thinking are required if New Zealand's to emerge from the COVID crisis with a more productive, sustainable and inclusive economy

By Paul Conway*

The global economy is staggering under the weight of the COVID-19 pandemic. Consumer spending has slumped, world trade has shuddered, and the global labour market has lost half a billion jobs in just a few short months. With the notable exception of China, most economies on the planet went into recession in the first half of 2020.

Before the pandemic, the International Monetary Fund forecast the global economy to grow by 3% in 2020. They are now forecasting a 4% contraction, making the estimated economic cost of the pandemic about 7% of global GDP and counting.

This is by far the biggest shock to the global economy since World War Two. In comparison, the Great Recession in 2009 shrank the global economy by just 0.1%.

Notwithstanding recent news on a possible vaccine, we still have a long way to go before the global economy is out of the COVID-19 woods. Parts of Europe are back in lockdown while the United States confronts the perfect storm of health and economic crises on top of political and human rights crises.

As the pandemic grinds on, it is becoming abundantly clear that there is no going back to the economies of the pre-COVID era. Spending patterns have drastically and permanently changed. Instead of restoring yesterday’s economy, our challenge is to adapt and build for the future.

This means changes in economic structure, with some industries growing and others shrinking. Structural change is difficult and costly, as skills and ways of working developed for the old economy become less relevant in the new. But it is also a critical aspect of recovery. Without it, we risk ending up with a plethora of ‘zombie firms’ out of place and unable to survive in the new economy.

Policy should not get in the way of structural change. As the recovery deepens, government support should not tie workers to certain jobs but encourage them out of shrinking industries and into areas of growth. Business assistance schemes should support firms that may be vulnerable now but stand a strong chance of being viable once the recession is behind us. By the same token, the process of going out of business should not be overly difficult or punitive.

As well as changes in economic structure, the pandemic is also changing the way many of us work. Most obviously, it has accelerated the digital transformation, with the sudden shift to remote working. This massive silver lining of the pandemic is to be welcomed – digital technologies have the potential to lift productivity and reduce the negative environmental impacts of economic activity.

Much less welcome is the impact of the recession on inequality. Unfortunately, recessions usually hit low-paid workers the hardest and the current one is an extreme case of that. These workers are unlikely to be able to work remotely and therefore more likely to lose their jobs. In contrast, workers with digital skills will probably weather the pandemic with their livelihoods intact.

The pandemic is also changing the shape of cities, which are de-densifying as workers work from home in the suburbs and businesses reduce the size of their central-city offices. This is also increasing inequality by concentrating job losses in low-wage industries that support office workers, such as retail, transport, cleaning, and food.

The increasing inequality playing out before our eyes highlights the pressing need to invest in worker skills, with a focus on improving digital capability. This was already important prior to COVID-19 but is paramount now and with no time to lose. We need to get radically better at upskilling workers for the digital age.

As well as making economies more digitised and less equal, the pandemic may also be making them less globalised. Widespread and repeated lockdowns are disrupting international supply chains and some governments are reaching for protectionist policies in misguided efforts to revive their economies.

On the flip side, the fact of being able to work remotely – thanks to digital technologies – means that we can now work anywhere. This implies huge potential for cross-border digital trade. The recent signing of a Digital Economy Partnership Agreement between New Zealand, Singapore and Chile is a welcome harbinger of a new form of globalisation.

Over recent decades, big economic shocks have not really led to any fundamental changes in economic policy or in how economies operate. These were missed opportunities and raise serious questions about our ability to undertake fundamental economic reform.

This time around, the risk is that policymakers once again fail to embrace change and to adapt our economies. Change can be difficult and deeply unsettling. But that does not mean we try to avoid it. Instead, we need to adapt in ways that are effective and protect vulnerable people.

In the case of New Zealand, our public health response to the pandemic has been among the best globally and our economy is performing much better than anticipated coming out of lockdown. This makes a mockery of arguments that an effective health response comes with higher economic cost.

In part, New Zealand’s strong economic performance relative to expectations is due to the Government’s stimulus package, which has been suitably large and speedily deployed. However, to achieve our potential and drive the New Zealand economy forward over the longer term, we need to add a microeconomic reform agenda into the mix.

This is easier said than done. For some time now, structural policymaking in New Zealand has been stuck in a rut and done little to improve New Zealand’s economic performance. This needs to change. We need innovation and new thinking on the policy front if we are to emerge from this crisis with a more productive, sustainable and inclusive New Zealand economy.


*Paul Conway is an economist working with the Bank of New Zealand. He was previously Director of Economics & Research at the New Zealand Productivity Commission. Paul has also worked internationally at the OECD and with the World Bank.

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.

48 Comments

all will be just well if only just keep the inflow of migrants, tourists, and.students coming.

@Xing. Go hardarse on restricing immigration. If we did that well population would drift downwards to our great economic, social andenvironmental benefit

If people can just work remotely, they don't even need to live in NZ, our remote working economy can be based overseas. It's the next wave of globalisation. I don't really understand how digilitisation is going to improve productivity, nor do I know many people who can work from home but if I could run a business where nobody needed to turn up to work, I would surely outsource all my labour to India, which would massively increase productivity because costs are so much lower there.

But we'd have skills/specialisations/domestic networks/technologies that mean high-value/high-wage economic activity would stick here. Just because labour is cheap in India doesn't mean they can do everything needing to be done. They key is ensuring that NZ is set up to keep the right bits of the production process here and to allow us to compete internationally doing interesting well-paid work.

Paul perhaps you could elaborate on the high value/high wage economic activities that would stay here? What are the "right bits"you speak of and why, given NZs sluggish and laggy internet connections, high cost of living and housing, comparatively drab and staid cities and 3rd world infrastructure would people either immigrate or stay here?

Yes, if we want to magnify the already serious problems of housing, unemployment, pollution, transportation, water etc then returning to a policy of bringing in swarms of low skilled migrants, low budget tourists and worthless foreign students sounds just the ticket.

Much less welcome is the impact of the recession on inequality. Unfortunately, recessions usually hit low-paid workers the hardest and the current one is an extreme case of that.

A document co-written by CIA InQTel Luciana Borio, recently appointed to Biden's Covid-19 taskforce, recommends linking Covid-19 vaccination with food security and rent assistance.

Want to not be homeless or feed your family? Guess you'll have to get an experimental vaccine Link

I see nothing here that identifies any specific policies. Terms such as 'micro-economic reform' don't lead me to any specific actions.
KeithW

Agreed Keith. I note he was a Director of the Productivity Commission so had ample opportunity to advance his ideas and yet NZs productivity keeps dropping. There has been a flood of articles recently calling for transformation, innovation and novel policy making, yet not a single one of them have come out with any concrete suggestions - just more waffle

There has been a flood of articles recently calling for transformation, innovation and novel policy making, yet not a single one of them have come out with any concrete suggestions - just more waffle

Yes. 'Digital skills' and 'working remotely' are hardly what I would call 'new ideas'. These have been commonplace for 20-30 years. Things might look different if you've been working for a bureaucracy in Wellington.

NZTE came out with a new digital platform during Covid. In essence, this platform is to 'help exporters enter new markets.' This is possibly what Paul is referring to in terms of innovation, etc. Nevertheless, I don't really see what has been achieved beyond a souped-up communications tool where you can basic information about different markets. As far as I'm concerned, this is not 'transformation' at all. NZTE hires many people so we're pouring a lot of resources into this govt function.

Hi, Thanks for your comments. I published another opinion piece on interest.co.nz a few weeks back with more specific policy suggestions. You can find it here: https://www.interest.co.nz/opinion/107109/bnz-economist-paul-conway-says...
Cheers,
Paul

Paul,
I have gone back to your previous article. Apart from digital technologies, the other recommendations seem to be about the need to 'strengthen' and 'improve' various aspects of the economy. The need to 'improve' and strengthen' has been around for a long time. The change relates to the specifics.
In relation to digital technologies, of course that has to be a focus, but it is not apparent that NZ has a natural competitive advantage to take a world-leading position. The people who make a lot of profit from the digital economy tend to be those who are close to the market and can see the market opportunities - the Jack Ma's and similar. The people who do the detailed software development are the wage slaves who can be anywhere in the world and they are paid at international rates set by countries such as India and China.
The key measure of innovation within the NZ formal R&D system, and the associated reward system, is academic papers. The links through to industry are tenuous. I say that as someone who works at the interface.
KeithW

yes, I think you are right that our systems for encouraging innovation could be much better and that we need much stronger linkages between academics/research institutes and businesses. So that is one of the many things we need to fix to straighten our economy out.

on your other point, I think we do have some emerging comparative advantage in the digital space. And we can build more, through the right skills training etc etc. Comparative advantage isn't innate. It's something we can develop through policy and the collective decisions we all make. A lot of my policy prescriptions for NZ are about building the right comparative advantages that work for us given our economic geography. I'm not saying that would be easy and of course we would face stiff competition from offshore. But to my mind, it is the best way of upgrading our current very much below-average economy.

Government needs to lead strategic, open cheque-book, initiatives to create environment for innovation that leads to value-added goods/services away from commodity driven trade. Not easy given our track record.

Where's our education system in supporting this? How can we do better? What can we do to encourage more R&D? Can we bring back 'brain-drain'? What can be done to make entrepreneurship, green-field manufacturing more enticing.

Paul,
The traditional economics concept of comparative advantage is not enough when it comes to innovation. In areas of innovation one also has to have a competitive advantage to be at the absolute forefront. You have to get there first and push back the frontiers of knowledge. And that is very hard to achieve in isolation from an innovation hub to provide the critical mass. Silicon valley is one well known example .These issues have been studied primarily from the perspective of strategic management rather than from within the economics profession. New hubs can and do emerge but there are no signs of this happening in NZ. It is very hard to find areas where NZ innovation is at the global forefront. NZ would need to find one or more very specific niches to focus on and it would be very high risk. I invite you to idenitfy such a niche, which has to be much more specific than simply 'digital technology'.
KeithW

Good luck Paul! People have been talking about this stuff for years, status quo vested interests won't budge!

Thanks Fritz, I know we’ve all been round the block on this many times already. But we gotta keep on trying! Imagine how amazing Aotearoa-NZ would be with a dynamic economy that was easy on the environment and delivered for all of us. And if there has ever been a time for economic transformation, it’s now. So cool to see plenty of young people voting in the last election. Change is coming….

Paul, what do you mean ... Delivers to everyone? That the owners of potentially zombie companies will have debt forgiven? That those chasing the share market money go round will be guaranteed say a +5% margin indexed to cpi? That all those engaged in the throw away economy will be able to keep importing cheap crap because that keeps people employed?
If we are serious about waste reduction (as just an example to focus thought), we'd require the end of life cost to be charged at first sale and have manufacturers funding end of life recovery. But that will hike retail prices massively, so consumers will buy less, and staff will be laid off, and companies will go belly up. There will be pain.
The call for change you voice, will be painful. Along with new innovative policy, there needs to be thoughtful initiatives to ease that pain for the lesser priveleged (unlike the Rogernomics reforms).

By "delivers to everyone" I mean an economy that serves all NZers, instead of just a wealthy few.

And considering and paying for the full life cycle of a product is exactly the type of thing we need to do if we are to live sustainably within the ecological envelope of the planet. That may well mean higher costs for some products in the short term. But it will also encourage innovation around reducing environmental cost, which is the whole point.

Yes, as I say in the article, change is hard - "we're all for progress, its change we don't like". But we have to change and adjust and move forward because that is how we progress. And I think we know a lot more about how to look out for workers that get directly negatively impacted by change. I like the idea of a "just transition". The alternative to embracing change and working with it is an economy that can't flex and adjust as the world changes. So the economy ossifies and becomes brittle. We would still get change in this world, but it would come in the forms of a deep and painful crisis after years or decades of trying to put off the inevitable.

Paul, forcing retailers to cost the full "life cycle" price of any product is likely to be either a commercial lame duck (if placed at point of sale) or in contravention to WTO rules (if you're considering a tariff) The "just transition" you speak of is a political soundbite - it certainly won't work in New Plymouth where the Govt has commited millions to turn a finite source of natural gas into hydrogen. To even consider such a project, let alone fund it, shows the desperation and cynicism of the current Govt.
This country needs to pursue new industry, not some hairbrained feel good sound good reiterations from overseas. Becoming a Pacific wide electronics recycler, all type plastics recycler,large scale lactoferrin producer - these types of things. Employment intensive industries is what we need, not remote working data centres

The danger of remote working is that the jobs will end up in India or the Philippines, if there's no need for any physical presence.

Exactly - my son works remotely for a World Bank entity in London as an IT contractor from Wellington.

Remote working across borders can be huge for NZ. The trick is to educate ourselves so that meaningful high-wage jobs end up here. (Like your son's work by the sounds of it).

Paul you seem to be particularly enamoured by digital expansion. two things - not everyone in NZ wants to drive a keyboard for a job and secondly most of the worlds best developers are in India, not here. I read your previous article and you also seemed to encourage the Govt to attempt to pick sectors and support them - are you serious?? Successive Govts in NZ couldn't pick a bunch of grapes let alone which sector or industry will flourish. Sure support industry but leave it to the private sector when picking winners

Governments have no business picking winning and losing sectors.

Reforming tax & education, building first-world infrastructure, targeting high-wage workers for permanent migration, simplifying R&D credits, providing more research funding to CRIs and unis/polytechs - that's the role our government should be playing in supporting a more productive economy.

Which ironically drives inequality in exactly the wrong direction, those with a high level of education get all the benefits.

WJ the world cannot be driven by pure equality - it's impossible and impractical. There will always be some who are more equal than others and attempting to artificially alter that is fraught.

I am very keen on digital because I think it is the type of economic activity that suits our economic geography down here in NZ. I think it is an area in which we can earn our way in the world. I know there are plenty of great developers in other countries. But there are also little market niches that are suited to the skills and other attributes that we have or are developing here in NZ. The experience to date is that some types of digital activities agglomerate in only a few places globally but other types spread out ("the world is flat"). Relative to the global economy, we only need a tiny drop in the bucket to lift material wellbeing.

I'm not saying we all need to become programmers, or something like that. That is just one of the areas in which we project ourselves internationally. We are also really good at agriculture (for example), so we obviously keep doing that and developing strong world offering in agritech. We would also obviously need to keep all the activity focused on the domestic economy going. So I'm not advocating a radical change to a single focus. It's more a carefully considered tilt to areas of economic activity where we have existing an potential comparative advantage and a proven track record of succeeding globally.

And I'm not saying that Government should pick winners in the form of preferred firms. But I do think we need to pick a few races in which we want to run. We are a very small economy and to some extent we are "doomed to chose". Of course the government needs to play an active role in those areas. Would Rocklab have got off the ground in Mahia Peninsula without the help of government? Doesn't the fact of having a Ministry of Primary Industries mean that government is working with the private sector in that area of comparative advantage? Let's stop pretending there's a level playing field and get on with building a better NZ economy.

Paul I disagree regarding digital - it's something that can be (and is) successfully incubated in far greater scale elsewhere. Market niches have a habit of either being copied or subsumed by larger better resourced players. We do have potential in agritech but until the moratorium on GMOs is addressed we're being left behind there too - Agriseeds(?) low emission ryegrass had to be trialled in the US and will not come back. PGW Seeds division was sold. Companies such as Pacific Edge and AFT Pharmaceuticals are showing the way forward. RocketLab was a loss and the Govt should have backed them (it was Callaghan and private investors that supported it initially not the Govt directly). Our one true leading edge company and it slipped through our fingers. MPI is more of a hindrance than a help so I wouldn't hold them up for accolades. In my view the NZS fund could do more in supporting NZ companies - Sanford and it's foray into collagen extracts springs to mind as a starter. If NZ is to succeed it needs patentable protectable exports not niche copies of something being done elsewhere in the world.

you know what - I think we actually agree on quite a lot. By "digital" I don't necessarily mean datacenters and the like. I mean knowledge-intensive. And digital is the infrastructure of knowledge. However, I do think Pacific Edge and the like tend to face into pretty small market niches and I don't think they'll necessarily be copied or subsumed. Paul Callaghan used to talk about NZ businesses doing well in "weird stuff", which I think is another way of saying the same thing.

Well now you've clarified that then yes.. we do agree on the basics. Have a read up on PEB - they have a large addressable market and a patented product, exactly the type of thing NZ needs.

Totally agree. In this regard, Government needs to have a vision though. So policy and action is coordinated towards the vision to encourage Kiwi entrepreneurship

Working from an equity rather than an indebted position would turn New Zealand on it's head. In a good way.
Ownership rules.

Absolutely. We need to save and invest in more than just houses. Changes in the tax system would help with that.

I have some concrete suggestions to rescue the economy. Issue daily doses of 2000IU of vitamin D to all NZers over 65 and open the borders. Don't bother with vaccination because the vitamin D will be less expensive and more effective. After we get tourism up and running we can focus on progressing mercantile policies.

Vitamine D efficacy links https://youtu.be/kJ1l0gLTjXQ and https://covid.us.org/2020/09/03/new-study-vitamin-d-reduces-risk-of-icu-...

(blah blah blah this week's theory)... open the borders.

Vitamin d now? What happened to herd immunity and the virus becoming less virulent and I can't remember the rest. Changing your theory in response to new evidence is no bad thing, the problem is that somehow the end prescription is always the same.

If you bothered to follow the literature you'd already know about Vitamin D, the attenuating lethality of COVID ie. the low and declining infection fatality rate. When I make posts here I always try to back them up with peer reviewed literature. But you're not really interested in logical reasoning are you because you're ideologically driven. You respond with the full spectrum of logical fallacies, false dichotomies, straw man arguments, ad hominem etc. try raising the bar.

Your way is failure Pat, unnecessary economic destruction and putting the population at risk of early death and lifelong health issues. Give it a rest, you're sounding like a conspiracy theorist.

There's plenty of examples of that failure out there. Step outside your echo chamber. We're doing pretty good thanks.

Ahhh.. the great youtube encyclopedia - font of all knowledge. If Vit.D is so effective why is this not being trumpeted from the roof tops? Big Pharma conspiracy??. The sample size was miniscule (75 patients) so hardly comprehensive nor conclusive. When a publication like Lancet, or the WHO starts talking about Vit.D is the time to take heed not before.

I did a quick scifinder search with the terms "COVID vitamin D" found 372 article references, 34 in MedRxiv. Also 368/372 were from 2020 so this is very new and It appears that scientific & medical community is taking vitamin D seriously. It's not reasonable to disregard everything but BMJ or Lancet, but here are two recent publications that came from the Harvard Medical School, if you think that's a decent institution?
Commentary. Eliminating vitamin D deficiency during the COVID-​19 pandemic: A call to action, Metabolism, Clinical and Experimental (2020), 112, 154322.
Vitamin D to prevent COVID-​19: recommendations for the design of clinical trials, FEBS Journal (2020), 287(17), 3689-3692.

fun fact - vitamin D is made from sheep's wool by saponification of lanolin to cholesterol + 4 more steps.

Fat pat, you really do need to get out more.

It's ludicrous to suggest we throw open the border and invite COVID-19 in. We have done sooo well keeping the pandemic out and to tip all that down the drain now would be the worst public policy decision in our history. It is incredible what we have achieved and getting the health response right has meant better economic outcomes than we would have had if COVID had taken hold here.

I never agreed with the 'herd immunity' school of though but it was a reasonable position to argue back in the beginning. But we have learned from Sweden, the US and basically everywhere else that keeping the bug out is way better if possible. We know how to keep it out and there is now a vaccine on the horizon. So your position is completely untenable now.

Lets hope the vaccine works eh... else there may need to be a revised position taken given the key drivers of 'wealth/wellbeing' is the free movement of man.

If Sweden emerges from a northern hemisphere winter with little to no excess deaths then it will be obvious that NZ made a catastrophic wrong turn. Countless jobs will have vanished, capital destroyed, government debt:GDP gone from 20->50% with no income streams from the debt, and all for nothing. That will be the greatest financial disaster in New Zealand's history and it will resonate for decades. In the meantime you can follow excess deaths in Europe from this site. https://www.euromomo.eu/

Maybe I was a bit harsh with my drop the vaccine comment but my point is that we shouldn't be relying something which may or may not come to fruition. You're saying we've invested so much and have done sooo well, but have we? has the economy? That's also essentially the sunken cost fallacy. The evidence is mounting now that the virus is not too dissimilar from the flu in terms of lethality, and there are less expensive more effective mitigation strategies. You wrote a good article on productivity and sustainability which I'm all in favour of, but how on earth is what NZ's doing sustainable or productive? It's the opposite.

> If Sweden emerges from a northern hemisphere winter with little no excess deaths

Good luck to them, but very few here would want to swap places and find out.

By the way "none" is no longer an option. What, 100 in the past week?

nz, and.....the rest of the world supporting lockdowns? Which work? Yes, given that Sweden have admitted they have clearly got it wrong, you stick to your guns.

https://www.businessinsider.com.au/sweden-herd-immunity-second-wave-coro...

deep sigh... look at Sweden's low death rate on the euromomo site! Re: lockdowns even the WHO now recommend against it, but what the heck lets learn nothing and have nationwide lockdowns for everything. Conjunctiveitis? - national lockdown, arthritis? national lockdown! tree falls in the woods? national lockdown! yeah that makes about as much sense as the Labour parties policy.

getting out more would help with the vitamin D requirement, so sage advice.