Formal contribution to the MED Panel on economic growth: 24 March, 2004.

Keywords: Growth & Innovation; History of Ideas, Methodology & Philosophy;

In the last three weeks we have had three interesting introductions to elements of growth theory. I do not see them as independent paradigms contesting with one another, but rather they are different facets of a more comprehensive growth theory. One thing which came through clearly, is that Solow’s neo-classical model of growth, now 45 odd years old, was both a powerful stimulus to growth theory, but very deficient. Much of the work of the last five decades has been trying to overcome those weaknesses. Many remain unresolved, and the empirical underpinnings of growth theory are still tenuous. Yet we tend to lapse back into a pure Solow model with its high degree of aggregation and vague notions of technology.

The vagueness of ‘technology’ is a particular problem. We think it a ‘good thing’ but without precision as to what we are talking about. I have always liked Joan Robinson’s notion that technology is the blueprints of how to do things. Others in this series have used a similar approach. (Theories of Economic Growth makes the notion of technology as blueprints more concrete.)

However, there is a great caution about the papers in the last three weeks, especially their relevance to growth policy in New Zealand. They all belong to a central concern of economists: how economic growth occurs in the world as a whole. They tell us little about how economic growth occurs in a country or a region, unless it is so large it can be treated as almost the entire wold. The one country for which that is about true is the US in the twentieth century, so if we uncritically apply these theories to New Zealand we are treating our economy as if it was the US.

That leads to the defeatism which I often see, for instance, in Treasury papers about growth. Defeatists say, implicitly for they are not very alert to what they are doing, the only way to grow is to be like the US: but New Zealand is too far and too distant to do that, so there is not much hope for us. A frequent policy prescription is that we should join up with Australia, with the implicit agenda that the Australasian defeatists think that the Trans-Tasman economy is too small, so it should join up – one way or another – with the US.

Economies and regions grows differently from the world models we have been looking at. To give one example. Adopting prescriptions which derive from world models, ignores that New Zealand is a very small proportion of the totality of the world’s research science and technology activity. Thus we ignore – as in the last versions of FoRST plans – the role of technological transfer in our RST strategy, even though we import international technologies all the time. Ironically, the omission arises because we unconsciously import the international technology of economic growth theory, without consciously adapting it for local conditions.

What might an economic growth theory consciously adapted for New Zealand look like? I have been working on this project for over three decades: hence my awareness of how uncritical most New Zealand growth theory is. (For a country which prides itself on its creativity and innovation, most of our economics is boringly imitative.) Let me sketch the central feature which applies to a small economy like New Zealand, as well as to regions.

I dont think in the last three weeks anyone has mentioned international (or inter-regional) trade. That is not the focus for a theory about the whole world. But it is crucial for New Zealand’s prospects. I cant go into any detail today, so let me make just two points.

First, international trade (and its regional equivalent) is a means by which a small economy can largely overcome any handicap of its size (while enhancing the advantages from being small).

Second, because of the falling cost of distance, international trade is becoming increasingly important, but also different creating opportunities for the more isolated that did not exist in the past.

You will find both ideas elaborated in, and central to, my writings. You wont find them enough in other New Zealand economists writings, which confuse the world as a whole (or the US) with New Zealand. As long as that occurs, defeatist policies will reign, and we will have a growth strategy which fails to realise all the opportunities that the world holds for New Zealand.