The Post: The world has moved on, but can NZ move with it?

Read the original article in the Post

That world has gone.” When Pro­fessor Ngaire Woods spoke these words on Wed­nes­day, she wasn’t just refer­ring to the now-shattered rules­based sys­tem of global trade. Woods – head of Oxford’s Blav­at­nik School of Gov­ern­ment, and one of our lead­ing intel­lec­tual exports – was talk­ing just as much about the post-Rogernom­ics view that politi­cians should be hands-off with the eco­nomy.

Speak­ing at the Treas­ury’s Ter­race HQ, Woods com­pared that approach – in which gov­ern­ments simply allow mar­kets to determ­ine which sec­tors flour­ish – as being like an old-fash­ioned “cock­tail party host­ess”, help­ing guests have a good time, but not par­ti­cip­at­ing her­self.

Now, even bas­tions of ortho­doxy like the World Bank are shift­ing their ground. In the 1990s, the bank argued vehe­mently against “indus­trial policy”, in which gov­ern­ments foster stra­tegic indus­tries using sub­sidies, trade pro­mo­tion, net­works to con­nect pub­lic and private bod­ies, and assist­ance with form­ing Sil­icon-Val­ley-style clusters.

But earlier this year, the bank acknow­ledged this argu­ment “has not aged well – it has the prac­tical value of a floppy disk today”. So why the shift?

First, Woods argues, chaotic Trumpian trade policy and grow­ing geo­pol­it­ical con­flict make it dan­ger­ous to always depend on trad­ing part­ners to sup­ply goods vital to our eco­nomy.

Second, China is decim­at­ing other coun­tries’ man­u­fac­tur­ing sec­tors thanks to a dec­ades-long indus­trial strategy in which the state expli­citly picked – and fostered – the areas of the eco­nomy that needed devel­op­ment. European and Amer­ican gov­ern­ments are, in response, ramp­ing up sup­port for domestic indus­tries.

Woods’ chal­lenge to Kiwi politi­cians was unequi­vocal. “In a world where all the major powers are now using indus­trial policy,” she asked, “what chance do you have as a coun­try if you are not?”

These ideas run counter to much local think­ing. In an edit­or­ial last month, this very paper argued that the $60m Golden Bay sub­sidy to secure domestic cement pro­duc­tion was simply “cor­por­ate wel­fare”. Such policy, it added, “saps pro­ductiv­ity and lowers our wages, profits and liv­ing stand­ards”.

One counter-argu­ment, though, is that in the post-war East Asian Mir­acle, coun­tries like Taiwan and South Korea became rich at break­neck speed pre­cisely by using indus­trial policy. Their gov­ern­ments suc­cess­fully strong-armed local com­pan­ies into becom­ing world lead­ers in semi­con­duct­ors, elec­tronic goods and other key sec­tors. Far from lower­ing pro­ductiv­ity and liv­ing stand­ards, “cor­por­ate wel­fare” – as part of this indus­trial upgrad­ing – did exactly the oppos­ite.

In the 1990s, Ger­many’s state-led Ener­giewende push for renew­ables laid the found­a­tions for a dra­matic decline in solar and wind power costs that benefited the whole world. This year, a National Bur­eau of Eco­nomic Research (NBER) paper found China’s own solar sub­sidies have gen­er­ated loc­al­ised social and envir­on­mental bene­fits that are twice their costs.

Nor are these out­liers. In 2023, another key NBER paper, co-authored by the respec­ted eco­nom­ist Dani Rodrik, can­vassed evid­ence that indus­trial policy – when done well – is gen­er­ally effect­ive.

The phrase “done well” is, however, of huge sig­ni­fic­ance. In her lec­ture, Woods argued that indus­trial policy can’t involve pick­ing indi­vidual com­pan­ies – espe­cially estab­lished play­ers or quasi-mono­pol­ies – and hand­ing them sub­sidies.

It should instead be guided by a clear stra­tegic view of the areas where the local eco­nomy is lack­ing and the kinds of invest­ments only gov­ern­ments can effect­ively make. This can include the shifts that bene­fit all firms, like lower power prices.

But it also involves industry-spe­cific sup­port for clusters, boosts to sec­tors that will cre­ate pos­it­ive spillover effects for oth­ers, and the filling of gaps where the local eco­nomy has not become as diver­si­fied as it should. It can extend to set­ting the “mis­sions” that the eco­nom­ist Mari­ana Mazzu­cato advoc­ates, in which an auda­cious gov­ern­ment goal – like get­ting to the Moon – “crowds in” private invest­ment and spurs new tech­no­lo­gical devel­op­ment.

But to avoid the closed-room deals that make many people nervous, indus­trial policy needs to be done with full trans­par­ency. Joint ven­tures between gov­ern­ment and busi­ness must involve com­plete pub­lic­a­tion of meet­ings, agen­das and minutes.

Sup­port for indus­tries should be time­lim­ited and depend­ent on increased export earn­ings. And if cer­tain sec­tors are favoured, there should be what Woods calls “ruth­less com­pet­i­tion” within those sec­tors, to retain mar­ket dis­cip­line.

On Septem­ber 1, the think-tank I helped found, IDEA, will host an Auck­land panel dis­cus­sion on “Made in NZ” eco­nomic policy. (Regis­tra­tion is avail­able online.)

The event will double as the launch of an essay we’ve com­mis­sioned from another Kiwi intel­lec­tual export, Lon­don School of Eco­nom­ics pro­fessor Robert Wade.

The essay acknow­ledges The­Post’s fears, not­ing that “the dangers of indus­trial policy are real”, espe­cially when it is used “for polit­ical pat­ron­age ... more than eco­nomic object­ives”.

Part of the answer, Wade writes, is for the gov­ern­ment to main­tain a del­ic­ate bal­ance with the indus­tries it sup­ports, close enough to know what is needed but not so close as to lose its inde­pend­ence.

Crit­ics will rightly ques­tion whether the New Zea­l­and state, cur­rently unable to update its bio­met­ric bor­der sys­tems without mat­ters des­cend­ing into sub­ter­fuge and project col­lapse, can handle the far-harder task of execut­ing an eco­nomy-wide indus­trial upgrade.

But these are the cut­ting-edge ques­tions of our time, the issues we can­not dodge. As Woods says, the world has changed.