When it is good to be the tortoise
Fri 26 Nov 2010 by Infometrics Ltd in International

We all know the story of the tortoise and hare. They face each other in a race, and the arrogant hare flounces about, finally losing to the slow and steady tortoise. Economists like to use the aphorism that economic growth is a marathon, not a sprint. This phrase actually holds far more wisdom than you would normally equate with economists. In a marathon there is no point in wearing yourself out just to overtake someone ahead of you (at least, not until the finish line is in sight). Sometimes it is easier to sit in their wind shadow and wait until they tire themselves out.

New Zealand has been the tortoise of the OECD for 35 years, ever since the UK cut its apron strings and we had to find new friends to play with. We have been struggling since then, trying to pedal products designed for Pommy palates to a variety of new markets. As a result, we rapidly dropped from around 6th in the OECD income ranks in 1974 to 18th in 1979[1]and have kept sliding to 24th in 2006. One reason this has happened is because we are making the same stuff we were back in 1974, but times have changed. Technology focused countries like Singapore and Ireland whizzed past us in the OECD rankings, while like the tortoise we plodded along. How many economists were employed trying to tell us how to be more like Ireland and Singapore?

But the race isn't over yet. It turns out that some of those countries were actually sprinting past us, and have since run out of steam. Greece and Ireland both had impressive growth which was fuelled by profligate Government spending and excessive bank lending, and both have received recent EU bailouts of their resulting debt. Their economies were like a marathon runner sprinting and they ended up wearing down the energy stores that sustain growth; a country's assets. Like marathon runners going too fast they hit ˜the wall'. In fact, Greece looks set to give us the satisfaction of being one of the few countries we have overtaken in the growth race in the past thirty years. While this might satisfy our jealous instincts, the resulting belt tightening is causing huge unrest in Europe. One of the bizarre results of the psychology of happiness is that people are not that fussed about getting richer (beyond a certain point), but they sure hate getting poorer. Resistance to cuts will be visceral, and there is talk of violence looming in Ireland this very weekend.

New Zealand has also been running down its assets by accumulating overseas debt. But ironically we have been sheltered from hitting 'the wall' because we never got around to changing what we produce. People may not spend a lot more on food in good times (for some reason they prefer to buy i-Phones) but nor do they reduce their consumption in bad times. Even better, the booming economies of the East are growing rapidly and as they get richer they want quality protein for their dinner tables. This still happens to be the one thing we are really good at making.

We have escaped by good luck more than good planning; our tortoise strategy has in some ways paid off. Yet we still need to heed the warning that it is possible to overextend oneself in single minded pursuit of a goal, such as catching up with Australia. We need to make sure that any sprint to catch Australia doesn't reduce our energy stores; our assets. We must not return to growth fuelled by housing debt.

There are other ways of reducing assets. Given the commodity boom, the pressure will increasingly be on to pull out all the stops and produce more milk and meat. Yet we need to be careful that this doesn't come at the expense of another national asset – our natural capital. We could grow more by cutting down more trees, irrigating the highlands, degrading more rivers. In the growth marathon this could turn out to be another version of Greece and Ireland's sprint. Given the risks posed by climate change, a viable alternative strategy to catch Australia might be to carefully manage our water resources and wait for Australia to run dry.

How do we avoid this? Unfortunately, our desire to sprint rules out many strategies that may help in the longer term, like a tax on capital. It might help to find better measures of 'progress', as much of Europe is currently doing. At the very least we need to measure and monitor more than just GDP. Then we can pursue economic growth, but with one eye on our stock of assets to make sure they are not getting eroded by a growth sprint.


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