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Matt Nolan looks at comparative advantage from a NZ viewpoint. The goal should be to excel and innovate when change happens, not hold on to failing industry. Your view?

Matt Nolan looks at comparative advantage from a NZ viewpoint. The goal should be to excel and innovate when change happens, not hold on to failing industry. Your view?
Summit Wool Spinners recently closed with the loss of 192 jobs. Are these type of businesses our future?

By Matthew Nolan*

A couple of weeks ago, I pointed out that as long as we have a strong democracy we don’t have to worry about the "rise of the robots" producing things.

New Zealand has seen the impact of improving technology overseas and explicit subsidies for manufacturing products over the past decade – with manufactured products becoming cheaper and cheaper, while New Zealand firms trying to compete are finding it harder and harder.

However, as I aim to argue here, the solution is not to stand in the way of change – but to help New Zealander’s grab it with both hands.

It is an undeniable fact that employment in the manufacturing industry has fallen sharply in recent years. According to the linked employer-employee data provided by Statistics New Zealand, employment in the sector peaked at an annual average of 234,473 people in the 2005 calendar year and had fallen to 201,648 people by September 2011 – a 14% decline.

At first brush, we may try to explain away this shift by using our prior robot example, and say that with capital becoming more efficient we don’t need as many workers to produce the same goods.

However, this is not what has happened within New Zealand – over the same period manufacturing real GDP fell 12%. As a result we can say that, a large part of the reason that manufacturers have been hiring fewer people because they have genuinely been making fewer things.

Symptoms or causes

It is at this point that people jump on the exchange rate as an explanation for why manufacturers have been cutting back production – given that the New Zealand dollar has generally been at a historically high level since 2004.

But when it comes to diagnosing the economic patient, pointing at the dollar is like pointing at a runny nose – it is a symptom of what is going on rather than the real cause.

To belabour an obvious point, the fundamental reason that manufacturers are shutting up shop, and are generally struggling, is that given their level of productivity they cannot make a sufficient return. They cannot get people in New Zealand or overseas to pay enough to justify creating these goods.

The Global Financial Crisis exacerbated this issue – but it has been a trend for some time.

New Zealand is a sparsely populated country that is far away from most large international markets. With fuel prices going up, increasing vertical integration (when different aspects of the production process are joined together in the same firm) and the rise of just-in-time inventory management, more and more manufacturers are positioning themselves “close” to market.

This trend, combined with the benefits of agglomeration in production and the improving use of technology overseas, has made manufacturing in countries like New Zealand less and less competitive.

This is tough for people who have invested time and skills in specific forms of manufacturing, but in so far as these changes are the result of changes in technology and the habits of global consumers, we cannot stand in the way of them.

Instead as a society we should aim to limit the harm, and give people the opportunity to move into things that New Zealand is well suited for.

What are we good at?

And this is the flipside – although New Zealand is comparatively bad at manufacturing things that require large scale (such as say cars) it is comparatively good at other things (producing milk).

Other countries having become more productive in the export manufacturing space it actually a good thing for New Zealand as a whole – as it has driven down the price of what we buy from overseas relative to the price of what we sell.

This can be seen in our terms of trade (the ratio of export prices to import prices), which has risen 10% since manufacturing activity peaked.

Many people will say that I am missing three other important drivers of what has happened:  Foreign subsidises, domestic government policy, and Dutch disease.

Since 1994 China has made a concerted effort to hold down the value of its currency, and subsidise manufacturing exporters. Similar, albeit less blatant, intervention has taken place in a number of other developing countries.

It is no doubt frustrating, and unfair, when your competitor is cheating to get an edge. But when the government in New Zealand looks at introducing economic policies, it should do so in the interest of New Zealand as a whole.

If some countries are indeed taxing their citizens to make their exports cheaper and to lend money to other countries, then they are essentially taxing their own citizens and giving the goods and services that tax would pay for to us!

Following the global financial crisis, some have called the Quantitative Easing programmes in the United States and other developed countries currency manipulation. However, this isn’t the case – these countries are using these policies to meet their inflation target and secure the value of their currency, not to excessively devalue it.

Knowing the trade-offs

On the domestic policy front, the mid-2000s saw a significant lift in local and central government spending and redistributive schemes. Working for Families and interest free student loans were two of the clearest examples.

The more government spends and taxes in order to reach domestic social goals, the less competitive manufacturers become – as higher taxes and spending increase labour and material costs for firms.

As a society we need to accept that this trade-off exists when we set policy.

Finally, Dutch disease is a topic that has received a lot of air play in Australia and New Zealand – and if it is true, it cuts to the very heart of my previous argument.

The idea behind Dutch disease is that if other countries are willing to temporarily pay more for a certain thing we sell (say dairy products), New Zealanders will respond by investing heavily in producing this good and cut back investment in other things. However, when the price drops all that investment becomes worthless, leaving the country poorer.

However, this way of thinking has three flaws:  It assumes that people investing do not think about the future very much, it assumes that it is always very costly to invest in the industries that are undermined, and most of the historic examples of Dutch disease have been shown to be either false or exaggerated.

Ultimately, as a society we need to accept that there is no silver bullet for making us all wealthier.

Over time, what is valuable and what is known changes.

As a result what is made and created, changes.

This is a reason to support people and give people the chance to excel and innovate when things change – not a reason to try and stand in the way of this change by interfering with the currency or using tax money to gamble by “picking winners”.


Matt Nolan is a senior economist at Infometrics. You can contact him here »

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There are lots of reasons manufacturing stays here or goes from New Zealand.  It's not just efficiency.   Or exchange rates.  There are many successful enterprises which logically have no reason to be here.  Say Scott Technology in Dunedin.  But logically there are no reasons for it to move either.  What seems to make the difference is ownership.  Local ownership means things stay and develop.  And in NZ enterprises where the local owners sell up.  Relocation is the next thing on the agenda.
Because New Zealanders are selling up large.  Stupidly.  The manufacturing is going. 
In places where the cultural tradition is for families hold and develop industries, very high tech and very productive industries thrive:   example.  Northern Italy.  And thrive in an environment where there is a very high standard of living precisely because of the existence of those industries.
We need to develop a concept of family and local ownership as a concept that produces.  And reject the vacuous approach of the financial services people who just want to churn transfers of shares.  

There is nothing wrong with letting the invisible hands do their own work and the market sort it all out.
I think what is missing is a direction. A direction of where NZ's potential comparative advantages can be cultivated, grown and harvested.
Agriculture is obviously one direction, but are there any other directions?
NZ is TOO small to follow OZ's path to dig up minerals, to follow USA's path to reply on finance services, to follow CHN's path to earn the current wealth by selling future generations' asset.
But there are other small nations that are on sustainable paths.
Why does not NZ follow Japan’s path, Korea’s path, Scandinavian countries’ paths, or my favourite – Germany’s path!!??
Germany started the WWI and WWII, and lost both, and pay huge amount of war compensations, but still be one of the richest country in the world. Why is that? Do our policy makers ask the question and try to find any answers?
To get NZ’s economy right in long term, govt needs to several things. They do not require big investments but a change in mindset:
1.       Ask our kids to work a bit harder because you will need to compete with kids from EU, US, Japan, China, Korea, Taiwan, and Singapore etc in next 10 to 30 years. And they are smart and work hard
2.       Change the social norm – studying a bit harder, getting a better grade, doing well in math, being a bit nerdy are COOL.
3.       Learn a second language
4.       Be responsible to your marriage/partnership and be responsible to your kids
5.       Speak clearly and a bit slowly so the world can understand you

Agree fully (being a traditional conservative sort, myself).
But you should realise that these values (for that is what they are) run up against three massive headwinds in a redistributive society such as NZ:
1 - relativity - no one value system is inherently superior to any other.  This persists (Celebrate difference!  Diversity is Good!) via repetition and laziness, because it is surely hard to find data which says that every culture is equally successful.
2 - Politicians, who create their own voting blocs by expanding Government (employees there, like turkeys not being keen on Thanksgiving, won't vote for the 'trim the public service' party du jour) and by expanding Tax Consumers (those who pay in tax less than what they are paid out from other's taxes).   Add together Govt employees plus Tax Consumers, and you have a guaranteed majority.  Periods (such as the one we're in, with a centre-Right, only mildy socialist Gumnut) are rare interludes.  The rest of the time we get Tax and Spend types who incidentally foobar the economy.
3 - Values cannot be changed by edict (as the Communist Parties of yore found to their dismay, hence the many and various Terrors, from Madame Guillotine, to Stalin, to the Great Leap Backwards in China). Values are absorbed by osmosis, occur by being raised in That sort of culture, and can be re-jigged by massive dislocations (Christchurch earthquake) which fundamentally change people's modes of thought as they reconsider what is really important.  A Revolution of sorts.  And at least any Terror there was Gaia's fault, not (as it generally is) a bunch of nasty Humans' fault.
So I'm afraid your wise words, even though correct, cannot influence matters much in Godzone....because those values are not at all widespread.

Mist42nz - I have to highlight your point. "It's not 'level of productivity' it's level of profitability".   
There needs to be far more emphasis on Profitability by Government when they undertake any type of analysis. Instead they create policy that reduces profitability and they then screech the increase productivity message to drive the economy out of the hole they placed it in the first place.

Fully agree Mist and you have made a very important point. Now how does one get them to focus on Business profitability as being the highest consideration for any Politician and policy? The trouble is business is seen as something they can benefit from and until this attitude changes we are all stuck in the system to get on as best we can.

You could increase the corporate tax rate, is that the kind of thing you were thinking of? That would insentivise politicians to focus more on corporate profitability, because tax is the governments main source of revenue.

Your blinkers are truely risible,
Naturally, if private enterprise is not profitable enough then that is entirely the governments fault, after all what else could possibly be wrong with private enterprise.

Nic - Business needs to be able to operate efficiently and profitably.
NZ needs more entrepreneurs and less bureaucrats.
You can twist words around on a page as much as you like but you cannot change the fact that many business costs are directly attributed to Government Policy. 

I think you need to go over to the mainzeal page and explain how all the causes of their collapse are the fault of the government. I especially encourage you to explain this to people who are paying for the cleanup of leaky buildings they developed, in person.

Nic - In case you haven't nioticed there have always been regulatory bodies who's job it is to oversee construction projects and ensure any build was/is up to the standards imposed.
There are also regulatory authorities who's job is to ensure building supplies products are up to the standard required for construction projects.
Mainzeal has had issues with leaky buildings. How much has this issue cost them?
Mainzeal like any other Company would have had high compliancy costs across every area of their business.
A staff of 400 in NZ would require a lot of support staff completing Government compliancy issues in the construction industry. 
We don't now why the shareholder backing was withdrawn as yet.

If Les Rudd or Walter Kunz were here , I'm sure they'd point out that the government needs to have a long hard look at how it disadvantages NZ manufacturers through onerous red tape and unnecessary compliance costs .......
..... how little things like the RMA / or ACC levies / minimum wage rates harm our productive sector , and effectively export jobs into Asia ...

Exactly GBH - regardless of who's in Government they all end up concerning themselves with how much they can extract.
On the bright side a rather large private manufacturing Canadian/US company has just created an entity down-under for distribution into Asia/ Pacific. Some assembly will be completed here and they have invested in land for which they will place their warehouse.
While profits will probably be repatriated back, NZ does get a fairly good kick-back out of this entity being here.  All sales people for the Asia/Pacific region based here as well. This Company obviously saw NZ as being a great place to do business from and obviously doesn't mind NZ's location from markets etc.

I think you are suppost to leave the low wage stuff out when explaining why their jobs are going overseas. People don't tend to support you when they find out that the other meaning of higher profits is lower wages.

Nonsense, the difficulty with explaining "low wage" to the financial illiterate that is NZ is that they seem to appreciate what that means for them all too well, and they don't seem to like the idea.
If you can't differentiate between a third world and first world economy, you don't have a point.  

Take the fact that 201,648 people employed in the manufacturing sector in 2011. If we do not address the high dollar, sooner or later the industries these 201,648 people work in, will not be here in NZ. These people need to be re-employed and what is the sector that can take say 150,000 of these...What are our options? Dairy farming? Sheep & Wool farming? We run out of options quickly. Imagine the cost of welfare if 150,000 additional people were to go to the state for some assistance of whatever kind...The social costs will be huge.
To avoid this scenario, we must do something to the symptom and the problem. If not this problem is going to grow on us quickly and we will have huge social costs that we could not possibly afford.

dont worry about it too much - when  the LabourManaGreenMaoriWinnyfirst  lot win the next election they will tax us all to prosperity,and Transmission Gully infrastructure planned et al will be no more

.... their grand financial master plan also calls for the minimum wage to be hiked up ...... which will make those few of us with jobs better able to afford a brand new state subsidised  Kiwi-You-Beaut $ 300 000 house  near Auckland ..... and you'll get some of that increased tax back after they've bumped up the  WFF " entitlements " substantially ....
What could possibly go wrong with that ! ....
... come on , smile .... you'll go mad if you don't ...

I have just come back from a church building meeting and one of our committee members is a builder. He told use that a new regulation is coming in.  It is to put Bean Bags around all scaffolding on building sites.  If any of you are interested there might be a good business in making them,  also there could be a side line of washing the blood off of them!!!!

Keriwin - correct! Bean bags will have to be installed on site. Another cost to producing the roof over one's head. Another cost in training staff and subbies on site.

I think NZ economists should also be open to global competition.

So we get cheaper morons?
How does that help pray tell?

They already are - which is why it is an industry where the wage rates aren't terribly different across countries

Renting and sharing: The business of the future
Many of us hanker after the very latest cars, TVs, computers and the like, but there's a growing realisation that there are not enough raw materials in the world for us all to have them.

Making money
It's a simple concept - instead of buying products, you rent or share them. The obstacles may appear entrenched, not least mankind's seemingly innate obsession with accumulating material possessions.

The success of some of these start-ups suggests businesses can also flourish under this model. Of course most of these companies were not set up to help tackle the problem of resource depletion, but to make money. And many of them are doing rather well.

3D printers are getting cheaper and better. One day we will be able to buy, or rent, or share our own robots, 3D printers and so on. Then we will be our own manufacturers.

The End of the Web, Search, and Computer as We Know It

People ask what the next web will be like, but there won’t be a next web.

The space-based web we currently have will gradually be replaced by a time-based worldstream. It’s already happening, and it all began with the lifestream, a phenomenon that I (with Eric Freeman) predicted in the 1990s and shared in the pages of Wired almost exactly 16 years ago.

It’s a bit like moving from a desktop to a magic diary: Picture a diary whose pages turn automatically, tracking your life moment to moment … Until you touch it, and then, the page-turning stops. The diary becomes a sort of reference book: a complete and searchable guide to your life. Put it down, and the pages start turning again.

I believe your key premise fails in the following line:
If some countries are indeed taxing their citizens to make their exports cheaper and to lend money to other countries, then they are essentially taxing their own citizens and giving the goods and services that tax would pay for to us!
In fact those determinedly surplus countries are taxing their citizens of today, in order to buy up the assets of naïve non competing countries like NZ. There are no free German, Japanese, Swiss or Chinese goods where I am; no free Audis or BMWs- in fact they are ridiculously expensive in USD terms.
So to not compete is not to accept free goods, but in fact a tax on future generations of NZers' wealth and income.
Other points in your paper that I do not agree at all with (hopefully my paraphrasing captures the points):
That NZ is and should switch into comparative advantage industries, such as dairy.
Nothing wrong with dairy; in fact I’m all for it, but the very high current account deficits and record unemployment for this century suggest there is little switching at all; we are just giving up market share. If we had fullish employment, or a CA in balance you could just about make this point. All the price signals point right now to house building or trading; or heading overseas.
That manufacturing for NZ as a small isolated country is a lost cause.
 Defeatist nonsense. It is a lost cause because of a perpetually high exchange rate; which means low to no margins, leading first to a self defeating nil investment, and then to ultimate demise. Australasia is a fair sized market; while Germany and China sell plenty of products far afield.
That NZ’s wrong domestic choices involve things like WFF:
The cost of the NZ government, in USD terms, has gone up 56% while National has been in office, assuming nil real growth in government. To fix that would require a third less nurses and teachers; or them to be paid a third less. A third less MPs might be fine; but the teachers and nurses not so much. There is a good reason why their wages are sticky; as in fact manufacturers’ wages are also sticky. Everyone’s rent and mortgages and other costs are in NZD, so to cut wages to be competitive isn’t feasible. Easier in the end just to fold, for those who have to.
WFF is probably the one policy that has helped manufacturers given it has subsidised the employment of those on the minimum wage, and so kept some employed.
The single biggest failed government choice is to have let government costs go up 56% solely because of the exchange rate.
That QE in foreign countries is not about currency manipulation.
In Japan and Switzerland, it overtly is. The US and the UK are also very aware of, and supportive of, the competitive effect on their currencies.
In summary our hands off approach to our exchange rate in the currency wars going on is a direct cause of a loss of long term market share and wealth.
There are of course separate arguments that to intervene would be very difficult for NZ; or the consequences of doing so would somehow be worse than the disastrous consequences of not doing so. I am aware of both arguments- ( Your paper is not making them), but I don’t accept they have been well made at all by any official like Key, English or Wheeler, so I don’t accept them.

"On the domestic policy front, the mid-2000s saw a significant lift in local and central government spending and redistributive schemes. Working for Families and interest free student loans were two of the clearest examples.
The more government spends and taxes in order to reach domestic social goals, the less competitive manufacturers become – as higher taxes and spending increase labour and material costs for firms.
As a society we need to accept that this trade-off exists when we set policy."
A statement such as this, all I can say is .. if that is your thinking, the socialists have won!
Government is no different  to the mafia.

You hit that one on the head Goron......and few people actually realise what the heck is happening. There is a saturation point and I think we must have been getting very close to it. When a majority become reliant on Government redistriubtion and spending they will keep voting for that Political concept as it in their personal benefit to do so.

With capital mobility now the major defining feature of globalization we have left the world of comparative advantage and entered a regime of absolute advantage which guarantees gains from trade to the world as a whole, but does not guarantee that each nation will share in those gains, as was the case under comparative advantage. Global gains under absolute advantage are theoretically greater than under comparative advantage, but there is no reason to expect these gains to be shared by all trading partners.

Great link - and he quotes Keynes at the end:
I sympathize therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel —these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.

Herman Daly:
Free trade and free capital mobility increase pressures for specialization according to competitive (absolute) advantage. Therefore the range of choice of ways to earn a livelihood become greatly narrowed. In Uruguay, for example, everyone would have to be either a shepherd or a cowboy in conformity with the dictates of competitive advantage in the global market. Everything else should be imported in exchange for beef, mutton, wool, and leather. Any Uruguayan who wants to play in a symphony orchestra or be an airline pilot should emigrate.

Most people derive as much satisfaction from how they earn their income as from how they spend it. Narrowing that range of choice is a welfare loss uncounted by trade theorists. Globalization assumes either that emigration and immigration are costless, or that narrowing the range of occupational choice within a nation is costless.

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Days to the General Election: 38
See Party Policies here. Party Lists here.