We think therefore we earn

BY ROD ORAM

OPINION: The knowledge economy often gets a bad rap. How can you make money thinking about things? Surely, making stuff is the only way to build a real economy?

But consider the NZX. Its latest results booked a profit of $52 million from selling its environmental registry. The business was barely 18 months old and the NZX had invested only a few million dollars in it.

We're going to need many more successes like it and figure out how to grow them into major international businesses rather than sell them off as start-ups if we are to have even the faintest chance of achieving the prime minister's goal of catching up with the Australian economy within 15 years.

While growth in goods will help make this a somewhat richer economy, there are physical limits to how many cows we milk or tourists we entertain. And anyway, those are low-value activities.

According to OECD data, we have the second longest work week among developed nations but we still languish in the lower rankings of GDP per capita. In other words, we're very efficient at producing low-value goods.

So, knowledge industries will have to do a lot of the heavy lifting.

Knowledge industires can create jobs that generate more value, offer more challenging work, pay higher wages and, in many cases, devise products and services that become weightless exports.

Knowledge industries are already bigger and faster-growing than many people might realise. Their contribution to GDP rose from 36.9% in 1996 to 45.5% in 2008, according to a Department of Labour study released in May but largely ignored.

Of course all areas of the economy require knowledge. So to identify the truly knowledge intensive sectors, the study drew on a UK definition: at least 25% of a sector's workforce must be qualified to degree level and 30% of the workforce must be employed in professional, managerial, scientific and technical occupations.

The fastest-growing knowledge-intensive sector in 2000-2008 was professional, scientific and technical services. There was also good growth in management and consulting services, information technology and architectural, engineering and technical services.

The biggest drop in employment was in physical publishing of the likes of newspapers, magazines and books. Conversely, the shift to online technology meant fast growth in software and internet publishing and broadcasting.

The study also shed light on very marked differences between the 73 territorial authorities, divided into four groups. In the first, only the Wellington and Auckland areas had more than 20% of private sector jobs in knowledge-intensive activities. They were also boosted by public sector work in health, eduction and government, which took them to 51% and 39% of their jobs respectively being in knowledge sectors.

This type of work is one of the reasons that value-add per employee in Auckland, a key measure of productivity, is 30-50% higher than the national average and is 120-150% higher in the CBD, according to analysis done for the Royal Commission on Auckland Governance.

The second group consisted of 11 places such as North Shore City, Christchurch, Dunedin, Manukau City, Nelson and Dunedin where more than 10% of jobs in the private and public sectors were in knowledge-intensive sectors.

The third group of 18 places such as Porirua, Tauranga, Opotiki, Waitakere, and Invercargill had public sectors in which more than 15% of jobs met the knowledge criteria but they were weak in the private sector. And the fourth group of places, predominantly rural, had below-average levels of such jobs in either private or public sector.

While this analysis offers some encouragement that we're becoming a slightly smarter economy, it also reveals three big weaknesses.

First, the growth in knowledge-intensive sectors is very patchy. For the country as a whole, such jobs grew by 28% from 2000-2008, but this was only slightly faster than the workforce overall.

In only four of 16 regions did they out-grow the job market by a few percentage points. Auckland was the best knowledge jobs grew by 37% versus 24% for the whole market.

Second, the detailed breakdown of knowledge jobs shows the majority are in the public sector. It had 319,820 in 2008 compared with 266,745 in the private sector. But the prospects of generating a lot more jobs in the likes of teaching, healthcare and the civil service, let alone paying higher incomes to existing employees, is distinctly limited, given the government's determination to run tight budgets.

Third, the detailed breakdown of knowledge jobs in both the public and private sectors shows that the large majority serve only domestic customers. This is a severe economic constraint. It means many knowledge workers are limited to the tiny, slow-growing, low-paying local market rather than having a chance to generate much bigger volume and value through exports.

This dynamic shows up in the balance of payments data. Merchandise exports grew by 42% to $44.26 billion in the nine years to the end of this March. That looks OK at first glance, but it is disastrously slow compared with the brisk growth in world trade over that period.

Worse, services grew even more slowly by 24% to $12.46b. But in fact the picture was even grimmer. If you take out transport and travel, which consists mostly of our low-wage, seasonal tourism sector, the true knowledge sector exports grew from only $2.19b to $2.86b over the nine years.

So, what's to be done to make this a true knowledge economy? Currently most businesses have strategies focused on increasing the volume or efficiency of their output, but very rarely on the value of it.

In fact, the dairy and tourism industries are going backwards in value terms. The price paid to farmers per kilogram of milk solids is now below the 10-year average. And the spend per tourist is falling thanks to fewer northern hemisphere tourists but more Australians arriving.

Here's one example of the power of knowledge. When Sir Ron Carter joined the Beca firm of consulting engineers in 1959 it had 10 employees. When he retired as chairman in 2002 it had 1250 staff and 25% of its work was overseas. It has since doubled in size and profitability with some 40% of its work overseas.

He says a crucial point came when the company reached about 100 people. By then, they were increasingly specialised and thus able to take on ever bigger and more complex work and grow faster.

Government has a role to play, too. In recent speeches, the prime minister has identified six thrusts to his government's economic policy: "regulatory reform; investment in infrastructure; better public services; education and skills; innovation and business assistance; and a world-class tax system".

Ministers are scrambling to develop policies in all those areas. Over the coming months, the government will be making many big policy decisions. Each should be judged by the same criterion: will it make this a more knowledge-intensive economy?

- © Fairfax NZ News