ECONOMICS : MoRST or WoRST?

A Treasury working paper published earlier this year made persuasive case for disregarding those who insist our farm sector is sunset industry when it comes to investing in research and development. It found the primary sector (mostly agriculture, but also forestry, fishing and hunting) had been an important contributor to improved productivity growth in the New Zealand economy over the past decade. Over the past 80 years the rate of growth of productivity in agriculture had continued to increase.
The paper emphasised the importance of investing in R&D. The primary sector had one of the highest average annual labour productivity growth rates among industries in New Zealand (at three percent), but this was still markedly less than primary sector labour productivity growth in Australia (which averaged 4.1 percent between 1988 and 2004).
Similarly, multi-factor productivity in New Zealand’s primary sector grew at an annual average rate of 1.5 percent from 1988 to 2004; the comparable rate of growth in the Australian primary sector was 3.8 percent. “It is worth noting that this higher multi-factor productivity growth in the primary sector was accompanied by higher public R&D intensity in Australian agriculture,” the Treasury paper pointedly observes.
Its data showed Australia has invested higher percentage than New Zealand throughout the sample period, with high in 1983 of 5.9 percent. Since then the trend has been one of declining public R&D intensity in Australia, although from 2002 to 2003 there was an increase from 2.9 percent to 3.8 percent. New Zealand’s level of public R&D spending as percentage of agricultural GDP remained relatively steady over that period, although it eased from 1.6 percent in 1975 to 1.3 percent in 2001.
In her Budget speech, Prime Minister Helen Clark said science and research was “critical to economic transformation” and noted that Labour had increased its investment in science and research by 65 percent since 1999. “We believe there is critical role for government in investing in the research which will produce the innovation of the future, across our primary industries, our high tech, our environmental technologies, and our biosecurity,” she said.
Whether this funding is being most effectively invested is the crux question.
A report published by the Ministry of Research, Science and Technology (MoRST) late in June collated, for the first time in single document, statistics on where R&D is being carried out in New Zealand, and the level and sources of investment for research.
MoRST chief executive Helen Anderson enthused about data showing the rise of the specialised scientific research industry, the fastest-growing area within the business sector. It has trebled in value in the decade to 2004, largely thanks to an increased emphasis on biotechnology R&D in New Zealand by the private sector. In 2004, $349 million worth of biotechnology R&D was performed and export earnings generated by biotechnology companies are predicted to reach $1 billion by 2014.
Anderson also said the primary sector was “a major focus of research in New Zealand” with 22 percent of all R&D in New Zealand supporting agriculture, forestry and fishing. But whoa. Another recent MoRST report, titled “Becoming more globally competitive”, reminds us that 72 percent of all goods exported from this country are generated from the primary sector.
More important, this paper recognises that the primary sector has significant potential to export more value-added goods and recommends that we should leverage our existing competitive advantage in this area to help transform the economy.
The paper warns against studying other countries, to simply copy the way they have succeeded. It advises that “this will not work – we need to forge our own path”.
New knowledge aimed at productivity gains or new export goods is best commercialised or applied by competent locally based businesses that make the goods in New Zealand, it says. Equating “businesses” with privately owned manufacturing firms is reasonable simplification in most OECD countries, where the primary sector is small and declining in relative importance. But in New Zealand “businesses” comprise farms and the primary sector collective exporters (eg, Fonterra in dairy PPCS and Alliance in meat processing, and Zespri in kiwifruit), as well as so-called “normal” firms.
This is well understood in principle, the paper says, but “the implications of the non-primary-sector manufacturing focus in the literature and the unsuitable policy prescriptions for us that could follow from this are not”.
It would be mistake to shift resources towards the standard global manufacturing model if that distracted New Zealand from building on its proven comparative advantages in favour of new sectors “where our long-term sustainable advantage is unproven, except in certain specialised niches”.
The paper emphasises it is MoRST opinion piece and does not necessarily reflect government policy. Opinion, maybe. But the Government can’t afford to spurn it.

Bob Edlin is regular contributor to Management.

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