Remember the New Economy? Unlimited 's first edition in 1998 heralded the new age: “This Way to the New Economy”. The National government was emoting about New Zealand 's knowledge-based ‘Bright Future'. Later the Labour-led government jumped on the ‘Knowledge Wave' bandwagon.

Commentators like Rod Oram and Howard Frederick were forever telling us that New Zealand was too dependent on commodity exports and should move to higher value-added products – as Frederick put it, “If we don't do something now we may doom future generations of our country to a pastoral subsistence”.

New Zealand 's future, it was said, was in ‘hi-tech' industries. Dotcoms were driving booming world sharemarkets; the New Zealand sharemarket was a dog: “The old economy is dead and its graveyard is the NZSE” ( Unlimited , July 1999). It was ‘E' with everything. Incubators! Flying Pig! Day Trading! The New Capital Market! Harvard ‘guru' Michael Porter joined in the hype (though he later decided ‘picking winners' didn't work). The Business Roundtable's line was “boring”; it should stop “whinging” about bad policies. As recently as June 2000, Unlimited was assuring us that “The new economy is real, big and trucks on as far as the eye can see”.

What a difference three years makes! In a refreshingly open editorial on the New Economy (Unlimited, Dec 2003/Jan 2004), Vincent Heeringa acknowledged, “These days, no one dares speak its name”.

With the dotcom collapse and the international downturn of the early 2000s, a measure of sanity has returned. Having avoided the excesses, the New Zealand economy weathered the downturn well. Taking the last 10 years as a whole, it was the 7th best performer in the OECD, thanks largely to the structural reforms of the 1980s and early 1990s.

Since the world sharemarket falls, the New Zealand sharemarket has outperformed most others. Business-bashing (“Our top companies are looking like old tarts at a teenage pool party” – Unlimited, Sept 1999) took a knock as New Zealand management and corporate governance performance was seen to compare favourably with scandals abroad. As Roderick Deane told Unlimited , “the knowledge wave conferences were a great diversionary activity” which was exploited by the government, but little of substance eventuated. The latest OECD report on the New Zealand economy urged the government to refocus on the economic fundamentals.

Much of the talk about the New Economy and the Knowledge Economy showed an embarrassingly weak grasp of economics.

There is nothing new about the role of knowledge. Knowledge has mattered for economic progress ever since hunters and gatherers left their caves. Peter Drucker was writing about ‘knowledge workers' 50 years ago. Sure, education is very important, but the Soviet Union had excellent scientists and engineers and was an economic basket case. We might well be better off if some people left school earlier and did old-fashioned trade apprenticeships, and if some did not proceed to university studies for which they are not well-suited.

The animus about commodities is mistaken. What's a commodity? McDonald's burgers, Starbucks coffee and Easyjet's budget airline seats are surely commodities but these businesses have made great wealth for investors. Australia , with over 50 percent of its exports in commodity form, has been one of the world's best performing economies. We become poorer, not richer, if firms make less money from wood processing than from log exports. All we need to concentrate on is what is most profitable at world prices, ie adds most to GDP.

Some commentators still write about R & D as if it were some magic bullet for growth. But there is no correlation across countries between R & D expenditure and economic growth rates. New Zealand firms have spent more on R & D as the economy was opened up to competition. The latest OECD figures put spending on R & D in New Zealand at 1.03% of GDP, not far short of Ireland at 1.17%. What matters more than R & D spending is innovation, and there is no evidence that New Zealand firms are innovation laggards. And just because some of a thing is good, it doesn't follow that more is better, or that we should subsidise it.

Now that the New Economy fever has subsided, what are the lessons to be learned?

One is that armchair commentators should show a little more humility. Too often they write as though New Zealand business people are dumb or irrational in failing to spot opportunities. In an economy open to the world, they should recognise that there is nothing to stop others entering the market and doing better, or indeed to stop them putting their own money where their mouth is.

Another lesson is that structural changes in an economy occur slowly. As former MAF policy director Robin Johnson tried to explain three years ago, tomorrow's exports will be much the same as yesterday's ( Unlimited , Dec 1999/Jan 2000).

A third is that the laws of economics don't change. They apply to the so-called New Economy just as to the old. It is extraordinary how many pundits, even ones based in universities, write about economic matters without the slightest reference to basic economics and research on how economies operate and grow. A nodding acquaintance with the volume of economic literature on growth now available – which points to the paramount importance for prosperity of the quality of a country's institutions and policies – might spare them from embarrassment when the next economic or business fads and fashions come round.

In the meantime, New Economy – RIP.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz