<i>Scramble! But are the pilots ready? </i>

01:43, Jan 31 2009

Global turmoil demands new insights and incisive policies from governments. So, which of the two main parties would best lead the next one here?

The winner of the election should relish, not shrink from the challenge. If it succeeds in helping New Zealand through this global chaos, it will build an enduring power base.

And, hopefully, the winner will be the party that's thought longest and hardest about the issues. Although financial markets have collapsed with surprising speed, the pressures have been building for a decade.

Anybody who's been working on how New Zealanders can earn a bigger living in the world knows we can come out of this crisis stronger and richer. We can fast-forward our own development by playing to three enormous shifts in the global economy.

Money is the first. Over the past decade, the world became sharply divided between creditor and debtor nations. Developing countries such as China and oil producers ran up big trade surpluses with developed countries such as the US, the UK, Australia and New Zealand.

As a result, they built up huge foreign exchange reserves. They loaned the money back to us so we could buy more of their goods. This cheap and abundant credit, whipped up by the reckless innovation of bankers, caused rampant housing inflation, debt-fuelled consumption and other undesirable excesses.


Bringing global markets and economies back into a better balance will require massive changes. Getting credit back to normal is the first step, meaning it will cost more and be less available. Countries like ours - New Zealand household debt is the second-highest in the developed world - will have to pay down a good chunk of their debt.

So, our next government needs to encourage New Zealanders to consume less and save more. KiwiSaver is helping households do so while the Superannuation Fund is helping the nation make the same shift.

Labour is committed to maintaining both mechanisms. National is promising to weaken them. Its halving of the government's contribution to KiwiSaver and its plan to have the fund invest more money locally will leave New Zealand, households and the nation, poorer in decades to come.

National is also promising bigger tax cuts than Labour. Past experiences show households are very likely to spend rather than save the money - the exact opposite of what people should be doing for long-term security. Moreover, the cuts will only force National to save money elsewhere.

Demand is the second seismic shift. The world economy is slowing rapidly. Governments can help their nations through this by striking a difficult three-way balance: giving cash to ease the pain for consumers and companies; making investments to build their country's capabilities; and prudently increasing debt temporarily to fund both activities through the bottom of the economic cycle.

Here in New Zealand the next government will inherit low debt levels by OECD standards and a wide range of spending programmes. No doubt it will add more of both to meet its own political agenda and the needs of the times. But it will also have to redirect some current spending into programmes that more directly help the country through the downturn.

Labour and National are both willing to increase debt and spending. But they have given few details on costs of new programmes or savings on existing ones. Thus, it is impossible to judge the cost of their proposals.

But it is possible to make some judgements on the value of their proposals. For households, for example, both parties are offering help to people made redundant. Labour will offer them free skill retraining, a long-term benefit. National will offer them mortgage relief, a short-term fix.

The contrast between Labour and National is even more apparent in the corporate sector. Labour will keep the R&D tax credit, expand skills training and help companies trade and invest overseas.

Given its understanding of the realities of the world economy and New Zealand's opportunities in it, Labour has developed these programmes well though the likes of Trade & Enterprise.

National says it will axe the R&D credit, even though the credit is helping companies upskill themselves. It is also very vague about what it would do with these development programmes. Once it gets into office, it says it will do more of the ones that work and less of the ones that don't.

But the trouble is, it has no basis for making those judgments. It has never articulated its view of the fast-changing world economy and thus what sort of companies we should be building here. National's finance spokesman Bill English said last week that "regulation and red tape is the No 1 issue".

National's failure to do the hard thinking on these issues is most glaring in the primary sector. Its agricultural policy makes the astonishingly complacent assumption that New Zealand has a future as a commodity producer. Try telling that to a heavily indebted dairy farmer who will struggle to be cashflow positive this season even with the forecast payout of $6.60/kg of milksolids.

National believes the solution is to cut costs by the likes of simplifying the Resource Management Act. It has no understanding of the real challenge: to drive value creation through new science, technology and business models that will help our farmers break out of the poverty trap of commodities. So, it says it will axe the Fast Forward Fund, a $2 billion government-business partnership designed to drive that transformation of agriculture.

Resources are the third seismic shift. Don't be fooled by falling energy, mineral and food prices. These are temporary aberrations because of weakening demand. When the world economy recovers, so will their prices. As a result, we're seeing the start of an urgent, historic hunt for new technologies, materials and processes to ensure billions of people can enjoy rising standards of living in coming decades.

Renewable energy and sustainable farming are two of the key goals globally. New Zealand is exceptionally well endowed with the resources for both. But to capitalise on them, we need policies that help drive their development and business models and national branding that make money out of them.

Once again, there is a stark difference between the two main parties. Labour's policies are modest at best on the likes of renewable energy and other sustainability issues.

But National's would be backward steps, with the possible exception of water standards. For example, it does not believe building codes have any role in improving home insulation. It advocates instead price mechanisms alone to drive change.

These great shifts are at the heart of the global crisis. They are also a great opportunity. But only for the bold and prepared. Labour is. National isn't.

Sunday Star Times