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Oram on the ‘step change’

Written By: - Date published: 10:55 pm, February 21st, 2010 - 25 comments
Categories: Economy, Environment, Mining - Tags: ,

Another excellent piece by Rod Oram in the Sunday Star Times. There’s actually very little to add. We’re all aware of the economic and environmental issues covered but Oram does an excellent job in revealing the big picture: a country that is still over-reliant on exporting bulk and cheap, and a government that has no ideas except more of the same.

While more sophisticated governments elsewhere are focusing on smart and sustainable growth, our government seems to think wealth comes from more milk and selling off our irreplaceable natural resources as quickly as possible.

RIP, SHIT and bust is a classic strategy, seductive to many corporates and countries.

It often looks good in the short term. Exponents exploit abundance such as natural resources, cheap labour or lax regulation to make quick profits.

Yet in their careless haste, they sow the seeds of their own destruction. They over-exploit their present opportunity and under-invest in their future. In due course, the enterprise or nation goes bust.

Yet, this is exactly the economic strategy our government is proposing for New Zealand. Its language says it all. It talks of “growing the top line” to achieve a “step change” in economic growth. This is corporate speak for doing more of the same.

The government says it will make it easier to produce more in dairy farming, mining, aquaculture and other existing sectors. Superficially this is appealing. Why not do more of what we’re good at? The trouble is more of the same won’t fix our economic problems. For 150 years we’ve earned a living from exploiting our natural resources to produce low value commodity products. As a result, we’re relatively poor and, worse, competition is intensifying fast from far cheaper producers overseas.

Take the dairy sector. To try to keep its high volume, low value model working it is throwing increasing quantities of water, nutrients and capital at increasingly poorer land. The ultimate expression to date is the plan to bring cows indoors in the Mackenzie Basin.

But most dairy farmers are profitable only at peaks in commodity prices. So how will more production, thanks to increasing costly inputs, make them more profitable? Or generate real wealth for the country?

Yet, the government says we will prosper by doing more of the same. It is a very 1990 view of a simple world, one where the cold war is over and unfettered opportunity beckons to produce lots of cheap food and energy.

But it is 2010 and the world is very different. Scarcity is the absolute crux of any corporate or country strategy. All resources human, financial and natural are in chronically short supply.

Thus the smart strategies are dedicated to producing the highest value possible from the least resources. Crucially, successful companies and countries are doing so by pioneering new clean technologies and astute new business models.

How could the government miss this epoch-defining insight? By shonky analysis. At one point before Christmas, the course it is charting for the New Zealand economy “took the form of a dozen or so A3 sheets of paper, each covering a sector,” Colin James wrote in his February 8 column in the Dominion Post.

Honestly, what kind of amatuer operation are these twerps running? A few A3s full of brainstorming (cycleway! party central! drill baby drill!) is their idea of a plan for the economy?

Here are some of the government’s favourite ideas:

Energy Minister Gerry Brownlee believes the government can unleash a “bonanza” of oil production. It is already our third largest export, generating $1 billion a year of revenues for the government of which $543m is royalties. He says there is the potential for “many billions more by 2025”.

Well, the world will certainly need oil for a long time yet before alternative fuels displace it. So we should contribute what we can to the world’s needs, although we would be wise to hold back our reserves until the price is even higher. But we won’t get much out of that extra oil production except some commodity export earnings, jobs and government revenues. The government is likely to spend the money on the likes of tax cuts rather than, as Norway has done with its North Sea riches, ring fence it in a sovereign fund to ensure it is invested in the country’s future.

Exactly. The last thing we want is to spend the one-off endowment we have in natural resources and be left with nothing to show for it in the end.

More oil won’t increase the sophistication of our science, innovation and commercialisation skills. Worse, it is a short-term distraction from investing in clean technologies such as geothermal, wind power and biofuels on which the world will ultimately depend and in which we have natural advantages, affinity and brand values.

This is the rentier state trap, the economy becomes over-dominated with one extraction industry and technology progress largely ceases, leaving the country unprepared when the resoruce runs out. We’ve encountered this problem time and agian through New Zealand’s history as the economy goes from being focused on exploiting one natural resource after another.

Likewise, minerals. Again we should contribute what we can to world supply. But we should do so by being a pioneer in green mining, thereby developing some valuable new science and skills.

That is not an oxymoron. It is possible to extract minerals in an entirely responsible way environmentally. And increasingly there are users who are prepared to pay more for that.

But the government doesn’t see it that way. It wants to ease environmental rules and, possibly, mine in national parks in order to compete on world commodity markets. Its idea of using some of the royalties to establish a conservation fund is an insult to intelligence and common sense. What’s the point of saving kakapo in one corner of the country if landscape is destroyed in another?

Establish an offshore financial services centre for managed funds. The idea is we can be a trustworthy back office, clipping for ourselves a minute faction of the multibillion-dollar flow of funds in and out of the country.

This is so 1980s it’s laughable. Back then we reckoned we could be “the Switzerland of the South Pacific”. Instead, we’ve seen a rapid atrophying of our financial sector as multinational companies consolidate services in larger centres far closer to major markets.

Why does the government think a tweak in tax regulations, a few incentives to lure expat workers and a marketing campaign can turn that around? Back office operations are the ultimate commodity business in finance, devoid of creativity, innovation and genuine economic value to the host country. Ask Ireland, the example the prime minister touts, how it feels about the swingeing job cuts multinationals are making in Dublin.

The Key government is living in the past and presenting the same old failed ideas – more intense use and abuse of the environment, tax cuts for the rich, social service cuts, privatisation. It’s never worked before and it won’t work now.

25 comments on “Oram on the ‘step change’ ”

  1. Neil 1

    this analysis suffers from presenting these options as mutually exclusive. EITHER we have smart industry OR we have mining.

    Since National is nor arguing that one is going to be sacrificed to the other it’s just a stawman.

    A bit more mining will help diversify our economy and provide funds to invest in other industries such as genetic engineering at the Liggins Inst.

    Much of what Oram says doens’t make sense. Oil production distracts from geothermal? Ah, they’re two seperate industries. But it certainly was a great pity that the Labour govt clossed the Geothermal Institute at Auckland University – run jointly with the UN, it trained many professionals from developing countries in geothermal energy production.

    • Mr Magoo 1.1

      err..what now?

      He did no such thing?

      I am not sure what you are reading there sunshine? In fact towards the end he talked about having SMART MINING?!

      Anyways, another great article by Rod. Nice to see him come back from his holiday “swinging” into action. And he was fair swinging with this one. Good to see.

      Please god let him be back on the national radio with his weekly business slot. It was one of the highlights of my week (yes, its sad). They replaced him with whats-her-name in the interum and it was shocking and embarrassing. She is NOT a financial expert. Reporter on something does NOT equal expert on something.

      God help us from media people who think this way about… other media people. Guess it needs no explanation then.

      • Mr Magoo 1.1.1

        Just checked and he IS back. For those interested:

        [audio src="http://podcast.radionz.co.nz/ntn/ntn-20100216-1110-Business_commentator_-_Rod_Oram-048.mp3" /]

  2. Neil 2

    closing the Geothermal Institute was a tragedy. But Labour stopping funding to the NZ Institute of Mathematics and its Applications (NZIMA) was perhaps just as anti-science.

    Clark turned up to the launch of wed material for NZIMA and gave a good speech about science and our future etc. Two weeks later funding cut.

  3. rainman 3

    Neil, I think you’re missing the point. I agree Labour did a bunch of stoopid things while in government, but that’s just distractery from Oram’s argument. Which is: National’s not working on anything except the same old silly ideas from the 90’s, in a world that has changed considerably since.

    Such, I fear, is the nature of conservatives – no imagination.

  4. Neil 4

    I think I addressed Oram’s central thesis – that having a few more mines/oil exploration and developing a high tech economy are mutually exclusive.

    Both can be done. Key chose Peter Gluckman – who’s at the forefront of using science to create industry – as the govt science adviser, not a dairy farmer.

    • Clarke 4.1

      While you’re right in theory – there is no reason why extractive and high technology industries are mutually exclusive – the reality is that there is only a certain amount of capital and intellectual bandwidth that can be applied to these things. And if the Nats were really interested in balancing the two objectives then I would have expected the number of new tech and innovation announcements to be similar in number to the dinosaur announcements … which is clearly not the case, and pretty much makes Oram’s case.

      • Neil 4.1.1

        the capital that the oil and mining industries use does not come from funds that would otherwise go to the Liggins institute and the Liggins institute does not tend to lose geologists and mine engineers to the extractive industry.

        the two things can be and are done at the same time – in Australia for example.

        I think there’s continual progress being made in the tech industry in NZ, maybe Key could make more play out of that but just because he doesn’t doesn’t mean it isn’t happening.

  5. sk 5

    The isssue is that the goverment has no growth strategy at all, and is not even thinking of one. Mining in national parks or dreaming of an oil strike is a fig leaf to cover their policy / strategic nakedness.

    It is time to stop re-litigating Labour’s term. Our crisis lies in the future .. . not the past

  6. prism 6

    Thinking about dairying. The growth in dairying business seems to require irrigation and we are allowing this sector to soak up so much of our precious water and it’s promised to them on long-term legal arrangements. But water is already going out of the commodity class of traded goods. And they throw the water up in the air as they bulk water their paddocks with wheeled irrigators, losing much to evaporation. Sustainable farming would have more dams, perhaps edible trees limiting evaporation and providing available feed supplement grown hedge like, or coppiced.

    It is crazy to allow this milk-rush, this house of cards, this unicycle industry balancing on a pin to have such control over both the economy and our water.
    Domestic financial planners say that the investor needs to have a balanced portfolio, that risk should be spread. Yet as a country we charge ahead with a single focus like children after a lolly scramble.

    f there is a small scare about disease, our agricultural industry can be shut down, and for cows there is foot and mouth etc. I think that there is a vaccine which could be used to control this but I don’t think anything has been done here or it has been discussed globally.

    • Draco T Bastard 6.1

      Yet as a country we charge ahead with a single focus like children after a lolly scramble.

      And that shows just how far back Nationals thinking actually goes. Countries producing specialised goods cropped up in the 18th/19th centuries. Got to a university economics course and you’ll still get shown the “proof” that countries should specialise in what they’re good at rather than having a broad economic base. If NZ becomes an even bigger farm (which National seems to want) watch as even more of our best and brightest leave. Not everyone wants to be a farmer.

  7. prism 7

    Really like this quote from the Rod Oram piece – it summarises and pulls no punches about us and the NZ economy.
    ” This fundamental flaw runs right across our economy. Quite simply, we have failed through 25 years of economic reforms and their aftermath to increase exports as a percentage of GDP, let alone shift them into more sophisticated, higher value activities.

    Yet, the government says we will prosper by doing more of the same. It is a very 1990 view of a simple world, one where the cold war is over and unfettered opportunity beckons to produce lots of cheap food and energy.”

    And financial markets fed that unfettered opportunity for advancement built on shoddy business deliberately subverting the standards for financial dealings that the ordinary person trusted to be in place and be followed in a supposed ethical, clever and experienced business world.

  8. Rodel 8

    Love the word ‘twerps’. Haven’t heard it for along time but it sums up John, Gerry, Rodney and co.

  9. Zak Creedo 9

    Okay, so what is Oram arguing for — a Steppes change! — liek one o’ those ten-year plans?

    Seriously, he cites The Energy Minister who is known in some of the places I frequent as gerry and the place-takers. Why..? Bcos he is now famously known as the guy on a huge put.. like you may have seen his Hansard (I think it is) assertion of NZ producing some 75 percent of the current OPEC output — 28 million bpd.

    Short advice: don’t buy. Who would.? Mebbe Steppes-type planners. And look where they went. Real quick!

  10. Geoff 10

    Rod Oram hits the nail on the head. The real challenge for Labour now is to offer the alternative. Unfortunately with its RMA reforms, support for market-based environmental policies and support for the expansion of Solid Energy’s mining on Stockton Plateau, the last Labour-led Government was really National-lite.

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