Yesterday I called for a further reduction in the OCR into negative territory to shore up business continuation through medium term debt relief. That’s a broad brush. Today I want to take the importance of business continuation to the next level. Let’s learn the lessons from this exogenous shock and focus on the structure, strength and resilience of our economy moving forward. The business leaders I speak to are up for this. Some are already moving but working capital will be scarce. Doing our level best to keep our businesses going must be addressed at all levels from macro and fiscal policies, to regional, community and single business strategies. Right through the system. Here I concentrate on a targeted fiscal package to help our companies not only weather the storm but look for silver linings as well.
The demand side of our economy will be seriously challenged as our major trading partners take steps to address CoVid19 in their own jurisdictions. The World Economic Forum has said the downturn will cost the global economy 1 trillion dollars. No idea how they arrive at that but it’s a big number. We will be challenged at home by a shutdown in international tourism, and other businesses and exporters are very nervous as well. NZ has been exposed by this exogenous threat, and a large part of why we have been exposed is that we have been slowly losing our international competitive position over the last 35 years relying on a basket of price-taking and price-sensitive sectors. As the BCG Henderson Institute said in a recent article: ‘A crisis is like a receding tide – it reveals the rocks beneath the surface that were there all along.’
We’ve increasingly become price-takers in our major exports, yes there are significant exceptions, but not enough. For example, we have seen significant growth in tourism and events as money spinners. These are, well, available pretty much everywhere and we have spent inordinate amounts of cash to promote our unique selling points. Unfortunately, international travel is price-, disease- and climate-change-sensitive as we are now finding out, the hard way. Forestry, well the export of logs, is also price-sensitive and susceptible to global demand swings and heavyweight competitors. I am familiar with examples of trees staying in the ground because we would lose money cutting them down and getting them to market. Now neither of these industries should be diminished in importance, because were pretty good at both, and there are opportunities to strengthen those sectors, but at present we have little control over our destiny. That situation needs to change.
This picture extends right across our economy. Regions similarly will be affected in different ways, in different intensities in different sectors. Supply chains, logistics, labour markets, capital availability, digital and IT capacity to name a few factors. We all know we need to value-add, innovate and move up value chains, we’ve been saying it for the last 30 odd years, at least.
Our trading partners, like China, have continued to provide ready demand for our low value, low margin, bulky, high transaction cost exports, and a fickle price-sensitive response to our high quality but expensive tourism offering (it costs a lot to get here and it is not that cheap when you do).
It has been too easy for us to rely on our narrow basket of export earners in the good times. Now as global demand falls, and pent up supply will increase, the structure of our economy looks decidedly weak. But there are green shoots, all over the place.
Let’s take this opportunity to work on the structure and competitiveness of our economy for the long haul, because we cannot, and should not, rely on immigration to pump up our economy when it suits us, as some kind of sugar hit. That is just covering the rocks. Our domestic economy not big enough for us to maintain the standard of living we desire. Growing our economy by increasing the GDP pie, does nothing of value for us if it does not increase productivity, prosperity and opportunity for New Zealanders at the same time. Its fool’s gold.
We also cannot continue to be “China’s farm” after a century of being Britain’s farm. You’d think that we’d learnt that lesson the first time around. Well, we sort of did for a while when we had a deliberate strategy of market diversification, but we lost our way thinking that market liberalisation would force us to become more competitive. It has in some respects, we don’t prop up uncompetitive companies, but global markets exert extreme pressure on a small economy like ours to be at the lower end of supply chains. Yes, food commodities become more in demand when times are tough, this has sheltered us in the past and will in the future, but we must do better.
Finance Minister Grant Robertson recently said at a Chamber of Commerce meeting in Wellington: “Diversification has been part of our agenda from day one… it's why we're pursuing other free trade agreements, it's why we're working on adding more value to products in New Zealand. So it's not just diversifying the markets, it’s diversifying the products….It’s understandable with a large market [China] that opened up after that free trade agreement but it's really important, [and] I think, one of the lessons from this [Covid19], that we must diversify.” I agree. Now we need to action those words.
The silver lining in the COVID19 cloud is that the rocks are now exposed, and we see them. Now we know what we have to work on. We must work harder on creating a diverse, competitive economy. We have to force our way into higher value markets through collaboration, innovation and hard work at home. This is called endogenous economic development, working on our game.
Last month I published a paper called ‘Powering up the Regions’. I wrote at length about how we should be taking a more endogenous approach to our economic development efforts; that is working with our own businesses, networks and clusters to innovate and develop smart specialisations that increase our international competitiveness. Not continuing to rely on commodities, tourism, housing and domestic consumption for our economic foundations.
If you are not convinced take a brief look at the declining position of our tradables versus non tradables since 2004. Non tradables have overtaken tradables as a percentage of real GDP for a prolonged period and the gap has widened. Ask yourself how we increase our prosperity if we cannot increase productivity. The PGF is a start in the right direction, focused on the real economy, infrastructure and skills, but we have a long way to go on this front. We need the innovation assets of our cities at this party as well.
I also promoted the idea that Economic Development Agencies should play a stronger role in government’s economic development plans. Now more than ever those mechanisms can play a central role at the regional level to ensure the economy keeps rolling. They are good mechanisms for two-way market intel between central government and the regions, they are aware of the structure and vulnerable pinch points in their economies, they know where opportunities lie, they can help to implement microeconomic policies, such as business support packages, and they can facilitate collaborative efforts in innovation and specialisation. They don’t know everything, nobody does, but they are conduits, the “limited slip diff” between the public and private sectors, use them.
BCG Henderson Institute analysis shows that 14% of companies across all sectors actually grow top and bottom lines during recessions. ‘They will find opportunities to improve foresight, agility and resilience through improvements in market intelligence, risk assessment, scenario planning, crisis management, communications, remote working, workforce redeployment, supply chain resilience, cross company collaboration, IT infrastructure and many other areas.’ Who are our stars? Can we do better than 14%? Yes. Why? Because we’ve had to pivot in the past and we are naturally innovative. Its part of our DNA. Let’s back the innovative power of the private sector.
In the face of the Covid19 cloud, my silver lining prescription is a Government backed Covid19 Business Acceleration and Continuation Fund (BAC Fund – sorry). Loans at 0% interest for 12 months, reviewed in relation to the OCR and global demand in 12 months, and paid back in 24. This would be aimed at:providing working capital to ride out bumpy or weakening demand for any business, big or small, where demand is likely to bounce back post Covid19.Innovative companies looking to add value, take advantage of market opportunities, or diversify their markets, products and services over the next 12 months, when others are asleep.
Picking winners? Damn right, why would you pick losers. Companies will not take on debt for the sake of it, they know they must pay it back. The right governance over this kind of fund would address serviceability issues quickly, but also take more calculated risks than banks are likely to using local intel. The worst possible outcome is that we invest, say, 1% of GDP in some of our most essential (large employers) and innovative companies. This coupled with a reduced [negative] OCR will maintain business confidence and prepare for recovery. Something we vitally need right now.
The longer game, strengthening our economy, requires commitment to funding R collaboration, innovation, specialisation and cluster developments that address global issues and market solutions. New markets and opportunities will appear as consumers adapt to this new, temporary, reality. In these ways I believe we can come out of recession slightly ahead of the game, because we’ve learnt, collaborated, adapted and implemented. Cool heads team NZ.
Dr David Wilson has been researching, teaching, consulting, advising and doing economic development for over 20 years. He is currently the founder of Cities and Regions Ltd, an independent research consultancy, immediate past chair and director of Economic Development NZ, a member of the Independent Advisory Panel for the Provincial Growth Fund, chair of the Inclusive Growth Network Aotearoa and director of Be.Lab a passionate and successful social enterprise dedicated to moving people from disability to possibility. He was CEO of Northland Inc, Northlands Regional Development Agency, from 2013 to March 2019 and prior to that Director of the Institute of Public Policy at AUT where he designed and led the Graduate Diploma in Economic Development and was integral in the Metropolitan Auckland Project that led to Auckland’s amalgamation. He holds a BA in psychology and social policy, a Masters in Public Policy (with 1st class Hons) and a PhD in Regional Economic Development. He is a fellow of Economic Development NZ (EDNZ) and in 2018 received the EDNZ Distinguished Service Award.