Max Harris and Toby Moore argue it’s time for the state to put past mistakes behind it and play an active role in New Zealand’s economic recovery

The Covid-19 pandemic has left craters in entire sectors of the New Zealand economy. Tourism has been sharply hit, with borders effectively closed. International education has been profoundly affected, as students find it impossible to enter New Zealand.

The Government has tried to support employment and reduce business failures through the wage subsidy scheme and other forms of public support, and our coordinated public health response – while not blemish-free – has helped reach a position where community transmission of the virus is contained enough to allow us to focus on rebuilding our economy.

Despite the many positive aspects of New Zealand’s response, there remains considerable uncertainty as to when or if many sectors of the economy will return to something resembling ‘normal’. New Zealand also has widely-held aspirations for an economy that achieves a broad array of social goals. Yet it is far from clear whether the economy that arises in the wake of the pandemic will be more sustainable, productive and inclusive than what preceded it. And the pandemic has revealed that, at any rate, we may not just want to return to a pre-pandemic ‘normal’.

In our view, what is needed is a long-term strategy where the state plays an active role in steering economic activity toward these goals. The focus should be on building productive capacity in particular sectors. The challenge for this approach is that industrial policy – as this function for Government is commonly called – has few vocal advocates and no shortage of ideological baggage within the current political debate.

Here’s the standard narrative, with which you are most likely familiar. Robert Muldoon did ‘Think Big’ in the 1970s and 1980s, leading to wasteful spending and environmentally degrading projects. The state was stripped back in the 1980s and 1990s, and we learned that the government can’t run businesses or pick winners. Since then, the government’s kept its hands out of sectoral development – merely setting the conditions for business growth.

We would accept that industrial policy can be done badly; but the same is true of education, social or monetary policy, which are all areas in which public policy should try to learn from its mistakes, rather than get out of the game altogether.

Contrary to the standard narrative, we believe the state can play a valuable role in shaping and coordinating economic activity, and that there is a strong case for it to do so. It’s how South Korea, Taiwan, and other countries have developed cutting-edge industries – and how a number of wealthy countries built economies before ‘kicking away the ladder’ from other countries trying to do the same.

As the economist Mariana Mazzucato has documented, public research funding has been central to transformative technological breakthroughs in the areas of biotechnology, nanotechnology and pharmaceuticals. Some of the world’s most innovative companies, including Google and Tesla, received public support during formative stages. More recently, organisations such as the International Monetary Fund and the London School of Economics Growth Commission have undertaken work on what a modern approach to industrial policy should look like.

We also believe that industrial policy of some kind is unavoidable, and that governments that insist that they don’t ‘pick winners’ almost inevitably do just that, whether unconsciously or implicitly.

The truth is that the state is always involved in the economy. As governments always have a necessary role in providing the institutional underpinning that markets rely on, it is not possible for the government to have a truly neutral role.

Which sectors the government meets with, who is made exempt from laws, which activities are taxed at a higher or lower rate – all of these decisions influence the success of different sectors. The same is true in terms of what areas we prioritise in funding education, skills training and infrastructure. When the government passes legislation saying workers in the film industry are independent contractors with reduced employment rights, that is an intervention in the film industry (though not one we think is very strategic or principled). When the government exempts financial services from GST, that is an intervention (one that is little discussed).

There are stirrings towards more industrial policy in recent policy thinking in New Zealand, including in MBIE’s Industry Transformation Plans; the $3 billion Provincial Growth Fund and New Zealand Green Investment Finance Ltd, which support regional and green development projects respectively; and in the National Party’s proposals for a National Infrastructure Bank and ‘Tech 2030 Plan’.

Though there are aspects of these policy developments that are promising, much of the policy thinking in this area still suffers from a Muldoon-shaped hangover. The scale and ambition of policies in this area is often limited, and there is little in the way of a clear mission around which public and private actors can coordinate. The National Party’s proposal for a National Infrastructure Bank, for example, lacks a mission and sense of direction, as well as clarity about the scale of public funding.

A more ambitious approach to industrial policy could be at the heart of the government’s strategy around economic recovery and renewal. A Green Investment Bank with a large capital injection could have as its mission decarbonisation and innovation, supported by a Green Ministry of Works, to boost public infrastructure. This could be part of a New Zealand Green New Deal. Industry Transformation Plans developed by the current Labour-led government – in sectors like digital tech, food and beverage, and forestry – could be scaled up with bigger funding commitments. Investment can be coordinated around enhancing the sustainability of our cities, and in creating quality jobs within regional and Māori economies. Consistent with Te Tiriti o Waitangi, separate funding should be allocated for iwi and hapū to develop Māori industrial policy. Industrial policy could be genuinely participatory, developed with local communities, using gender-responsive budgeting.

This is not an endorsement of free-for-all spending or open-ended support for businesses. A more ambitious approach to industrial policy should go hand-in-hand with sound institutions around decision-making, including operational independence around funding individual projects, clear objectives and metrics for assessing success. Work may need to be done to ensure there is space for active industrial policy in our trade agreements. Others may have concerns that a more ambitious state opens up more possibilities for political favourism or industry capture. Our view, however, is that an acknowledged and openly discussed industrial policy is likely to be more effective, and less open to abuse, than our current hands-off, ad hoc, and unacknowledged approach to shaping economic development.

An active role for the state can play an important part in shaping New Zealand’s economic recovery, and we should not let the mistakes of the past unduly constrain our ambitions for the future. A strategic, coordinated, long-term approach will be crucial if we want a more sustainable, inclusive and productive economy in the wake of the pandemic.

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