COVER STORY : The State’s Long Arm – How government intervention can hurt business

The Labour Party turned 90 on July 7 – the longest surviving national political organisation – but the old socialist dogma of nationalisation of the means of production, distribution and exchange disappeared years ago.
Labour’s new mantra is “economic transformation” – belief the country can be turned around by the dominant economic clout of the state and regulation for the public good.
It started when the Government in 2002 extended the power of general competence to local authorities, allowing them to branch into areas well beyond their core business. It crystallised in central Government on June 2 when State-Owned Enterprises Minister Trevor Mallard launched SOEs on new path to bring this economic transformation about (see box story “Mallard set to father baby SOEs”).
SOEs, if Mallard has his way, will become like Japanese zaibatsu – huge companies with interests throughout the economy – leading the technological charge for revitalised New Zealand. They will operate as companies, listing or floating subsidiaries on the struggling NZSX, but the SOEs themselves will remain in public hands.
This is Labour’s road to capitalism – far more effective than its nationalisation of mineral rights in the 1930s and coalmines and the Bank of New Zealand in the 1940s, and infinitely superior to its Industrial Efficiency Act of 1936 or its plethora of import or exchange controls that followed.
Labour has seen capitalism’s promised land and likes it; it just wants the state to have the right of way to get there first.
So SOEs are being encouraged to go forth and multiply to produce new generation of baby SOEs in way the former Brierley Investments produced number of “baby Brierleys” in the early 1990s. That is about as near as Labour gets to the private sector. It remains, 90 years after its birth as wild socialist party, immensely distrustful of business but willing to let it prosper within straitjacket of regulation and high taxes.
Much of Labour’s thinking on regulation comes from Britain when Tony Blair’s New Labour dumped nationalisation in favour of European-style “regulation for the public good”, designed to remove capitalism’s rough edges while giving politicians and bureaucrats unprecedented power to interfere in the day-to-day running of business.
The New Zealand Government is to the left of the British camp – Blair is not opposed to privatisation – but state direction follows closely on the British model. Here, businesses can expect degree of state advice or direction on issues as wide-ranging as employment and dismissal of staff, work practices, advertising and promotion, financial reporting, raising capital, appointment of independent directors and offering professional advice and services. This creates less-than-friendly environment for business to operate in.
If direct link could be established between business regulation and corporate wealth-creation – the latter being the prime duty of directors and managers under the 1993 Companies Act – then the private sector might be willing to play along. But for now, many businesspeople view the growing layers of regulation as latent means of state control.
The Ministry of Economic Development, the most powerful of the regulating state agencies, says as much, describing law, finance and business regulation as “one of the most important ways government influences the business environment” (see box story “Regulation’s tentacles”). With missionary zeal, the ministry sees itself as the guardian of business. Without regulation, to quote former economic development minister Jim Anderton, New Zealand was the “Wild West without sheriff”.
What the ministry does not, and cannot, do is provide evidence that regulation creates more jobs, more security, more wealth (other than for the army of bureaucrats who enforce the edicts), protects investments or guarantees the survival of companies. Regulation is “feel-good” measure –the state’s reaction to the excesses of the 1987 sharemarket crash – but it does not appear to be the platform on which to create growth.
New Zealand Business Roundtable executive director Roger Kerr is convinced that regulation actually inhibits growth by taking up managers’ time and imposing onerous compliance costs on business.
“What is important for wealth creation and growth is free environment in which it is easy to do business,” he says. “That is what encourages entrepreneurship.”
Kerr does not oppose markets being properly structured and professionally run but governments should not impose rules that make business difficult to conduct.
“Regulation and taxation are the main areas of government intervention that are negatives from business point of view.”
Kerr says the Government seems obsessed with stamping out insider trading when it is not serious problem.
“Insider trading is not significant issue in the New Zealand market and so much [Government] arm-waving about ‘Wild West’ behaviour is not appropriate.”
Business New Zealand is similarly concerned about the effect of regulation on business growth. Last month it launched savage attack on the Government’s regulatory regime in publication, Regulation Perspectives.
In it, chief executive Phil O’Reilly said regulation could affect capital and operating costs and lead to resource misallocation, and reduced innovation, investment and productivity.
“The need to comply with government requirements can also have non-quantifiable effects such as stress and anxiety, such ‘psychic costs’ arising from uncertainty about obligations.”
O’Reilly said certain level of regulation was necessary for any country wanting to provide stable economic environment in which to do business, but too much regulation could discourage investment and productivity.
He said evidence showed that self-regulation was the least burdensome approach for taxpayers.
This is where Business New Zealand and the Business Roundtable differ. The Roundtable has consistently attacked regulation, whether by the Government or by proxy through industry regulators. It opposed NZX moves to prescribe corporate governance rules, saying the arrangements that worked best for company were “complex interaction of people, processes, culture and institutional arrangements”.
“Their prime focus should be on company performance,” the Roundtable said in submission to the NZX in 2003. “The crucial question is what arrangements best serve the interests of company shareholders.”
The Roundtable is similarly unenthusiastic about the Institute of Directors’ accreditation system for members though Roger Kerr is an institute member.
Institute president Rick Bettle points out that membership of the institute is voluntary and that accreditation is not an examination but rather programme to lift directors’ competencies.
While the debate over regulation and self-regulation rages, the Ministry of Economic Development is undertaking other “missionary work” as part of the Government’s economic transformation programme. It includes the promotion of regional development, in partnership with New Zealand Trade & Enterprise, and Project Collaboration, an exercise that grew out of the 2004 Budget to “assist the development of business capability” by developing better business leadership and management.
The project, renamed the Business Capability Partnership late last year, was launched with $2.5 million grant from the ministry and receives $1.3 million annual funding. Well-intentioned like the ministry’s policy under Anderton of “picking winners”, it has not influenced business thinking or practices in its short life or come close to its stated aim of raising business capability.
Indeed the project, led initially by former Trade New Zealand chief executive and former cabinet minister Fran Wilde, is in danger of being captured by two think tanks, the New Zealand Business Excellence Foundation and Massey University’s benchmarking group, the Centre for Organisational Research and Excellence. There is