Leslie Young
Professor of Finance & Executive Director
The Asia Pacific Institute of Business, The Chinese University of Hong Kong

Introduction

New Zealand is at the leading edge of reforms in the "Anglo-Saxon" political economy now sweeping the world via the economic feats of the U.S. and the resurgence of the U.K. For its original reforms, New Zealand is regularly saluted by Anglo-Saxon opinion leaders. However, the reforms have been a practical disappointment for New Zealand, failing to generate sustained growth or technological dynamism. Indeed, New Zealand is slipping toward the fate of Argentina and Uruquay, primary producers fallen from some of the world's highest living standards to the brink of the Third World. That the ship is sinking is clear from where the rats are swimming: skilled New Zealanders to Australia; Brierleys to Singapore. These exits highlight a danger not faced by Latin American primary producers: being quarried for talent by other Anglo-Saxon nations, like Ireland before its reincarnation as the Celtic Tiger.

New Zealand can certainly learn from Ireland's recent success, but even more from its tragic history. Like New Zealand today, Ireland was a small nation on the periphery of a civilization that, for one glorious moment, became its intellectual leading edge. In that moment, Ireland fostered ideas that were right for every nation in the neighbourhood - except itself. Geography and historical accident then condemned Ireland to a millennium of misery from a neighbour grown mighty by exploiting its ideas.

How The Irish Saved Civilization

Europe's intellectual centre for a century between the Fall of the Roman Empire and the Rise of the Holy Roman Empire, was a small, damp island, so poor and remote that neither Romans nor Germans bothered with it. Consequently, Ireland provided a haven from the Fall of Rome for refugees who brought with them the seeds of classical and Christian civilization. Irish monks preserved that heritage for the modern world by furiously copying its texts into illuminated manuscripts, such as the Book of Kells. Irish missionaries taught Christianity to Scotland, then England, then the Holy Roman Empire. Transmitting the monastic ideal from the Near East to the West, Irish monks built an institutional base for the Church that was crucial, not only for medieval civilization, but also for the modern world. The recent global financial crisis has underlined the importance to business of transparency and the rule of law. These concepts, and professional classes required to make them operational, first arose in the monasteries - stewards of vast properties, which could not be inherited by the illegitimate offspring of their ostensibly celibate personnel. Thus, canon law was the first modern legal system; a Franciscan monk invented double entry accounting.

The Church which grew up from the Irish mission also provided the Norman dukes with the military force to dominate their barons and build a state capable of conquering England. Aided by churchmen like Bishop Odo and Thomas a Becket, the Anglo-Norman monarchy then built the most advanced state in Western Europe, colonizing France, Scotland - and Ireland. This monarchy institutionalized a process-driven Common Law, just before the revival of a top-down, code-driven legal system on the Continent based on the rediscovered texts of Roman Law. The uniquely open English legal system provided the framework for the uniquely flexible Anglo-Saxon capitalism now advancing worldwide.

...But Not Themselves

Because of its unfortunate location and size, Ireland served itself ill in rendering its great services to civilization in general and England in particular. Monastic erudition and the creed of the gentle Saviour was the last thing that Ireland needed as the Vikings rowed up in their longships, axed the monks, burnt their monasteries, and ripped off the bejewelled front pages of their manuscripts. While the Irish learnt military skills from the Vikings, another misfortune befell. Had either Brian Boru or the Vikings won the Battle of Clontarf in 1014, the victor might have built a strong Irish state, which might have launched the Irish Conquest of England. Instead, Brian's army won, but Brian himself was killed. This stalemated Irish state formation for just long enough for other Vikings to set up the Norman duchy, the base for the conquest of England, in turn, the base for the conquest of Ireland.

Another English colony - France - fought off the English in the Hundred Years' War, because its size and location made it a polity intrinsically equal to England. A third English colony - Scotland - never recovered political independence, yet enjoyed a different, glorious, fate as full partner in Anglo-Saxon hegemony, contributing not only administrators, soldiers and political leaders at every level, but also more world-class achievers per capita than any other nation (Adam Smith, David Hume, James Clerk Maxwell, James Watt, Sean Connery..). Alone of that proto-British Empire, Ireland institutionalized national failure, for a millennium losing its brightest and best in the Flight of the Earls from Ulster, the Flight of the Wild Geese from the Penal Laws, the Flight from the Potato Famine, from the Easter Rising, from the Troubles.... The rule is proven by Ireland's proudest exceptions: the Nobels in Literature for Joyce's novel about a world-class Pub Crawl and Beckett's play about world-class Waiting, past-times to which the Irish were relegated by English oppression. The religion that they had done so much to promote became for the Irish a refuge, but also a prison.

How The Kiwis Saved Civilization Australia...

A parallel to the melancholy fate of the Emerald Isle might be sought in the saga of intrepid Kiwi missionaries bringing enlightenment across the Tasman to half-naked Aussies daubed in suntan lotion, befuddled by primitive socialistic superstition and Fosters, in thrall to Australian Rules, stroppy unions and fish-and-chip-shop druidesses. To the chagrin of the spiritually advanced Kiwi, their teachings were used by their gross brethren to reform their bigger, better-endowed, better-located economy into a base for the conquest of Aotearoa, or at least its banks and its talent.

...But Not Themselves?

Doleful though this allegory, the true plight of New Zealand is worse. The Irish nurtured a religion for the next millennium that transcended national boundaries to uplift the world at large - but that was exactly the wrong creed for a small island exposed to Viking raids and to invasion by neighbouring states. Similarly, New Zealand proposes a political economy for the next millennium that transcends national boundaries and shall uplift the world at large - but that is exactly the wrong creed for small islands exposed to raids on its human talent. Australia is just the most obvious of the raiders who, in fact, comprise the entire Anglo-Saxon world. To that world, New Zealand brains are uniquely liable to drain, because it has Third World salaries, yet a First World society producing confident, adventurous, trustworthy, likeable people who, by language and culture, fit easily into the opportunities burgeoning in that world, plus a First World education system with the scope and integrity to identify and foster talent. In particular, New Zealand universities are in touch with, but not competitive with, the world's best, so that their internationally-credible transcripts and professors can facilitate the export of talent.

How came we to this? Universal religions arise in ambitious minds under-occupied in arenas too small. Hebrew shepherds, bored with watching flocks by night, diverted and flattered themselves by conceiving of an abstract, universal Shepherd in divine Covenant with their geopolitically insignificant tribe, forever upstaged and stomped underfoot by the local heavies of Egypt and Assyria. Likewise the Irish, too big for their bogs, coracled off to evangelize Europe and save civilization. Likewise also, the miniscule Land of the Long White Underwear was hopeless as a platform for geopolitics; exquisite local miniatures by Katherine Mansfield and Barry Crump only aggravated the appetite for Big Thoughts on Big Issues; other nations' ideas, culture, history and literature only emphasized our Antarctic remoteness and irrelevance; the world-class, but ultimately fatuous, physical feats of brawnier compatriots only exacerbated existential anxiety and the thirst for international renown.

Bold experimentation on a midget political economy was, however, a world-class activity available to our elite, as they refined the tribal creed of "She'll Be Right" into ever more profound, more universal, essences of Laissez Faire. Their vision convincing because successful in the big Anglo-Saxon economies, their self-esteem gratified by the acclaim of the Economist, the International Herald Tribune and central bankers the world over, our All-Black Khmer Rouge were goaded into ever-deeper slices of the microeconomic scalpel into the inert body politic by its tedious failure to revive economically under their jabs.

The State In The Knowledge-Driven Economy

Just as the Sermon on the Mount is practical policy only given an infinity of cheeks, so the austere prescriptions of microeconomics assume not only perfect competition and no externalities, but also perfect information, complete markets, costlessly-enforceable contracts, non-increasing returns to scale and divinely-created firms. The deep enchantment of this internally consistent theoretical world cannot be shaken off by the mere awareness that its assumptions are egregiously violated in the knowledge-driven economy to which all countries now aspire. In fact, knowledge-driven economies have arisen, not from laissez faire, but from national strategies to redress those violations.

• The non-appropriability of human capital has been addressed by state funding for education. When Finland experienced an economic crisis in 1990, it cut back massively on everything except education. This was crucial to the rise of Nokia, the only company in the global Fortune 100 based outside the major world economies.

• Incomplete markets for capital and knowledge have been addressed by state promotion of basic research and enabling technologies. Again, Finland not only poured funds into basic and applied research, but promoted competition in telecommunications with the explicit objective of creating a world-class technology in this field.

• Increasing returns and externalities from the agglomeration of knowledge have been addressed by state initiatives to assemble a critical mass of capital, entrepreneurs and skills, e.g., tax-advantaged export-processing zones and science parks to attract skilled expatriates.

• Oligopolistic product markets have been addressed by state support for the development of technologies to capture monopoly profits for the nation, e.g., the European Airbus consortium, the initiatives of Japan's MITI.

State action to build technological leadership places severe demands on the management skills and political autonomy of administrators. This state action is all too easily hijacked by rent-seeking interest groups. Success typically requires cohesive societies with a strong sense of national purpose, plus high-quality administrators. The small nations which have succeeded in building a dynamic hi-tech sector- Israel, Finland, Taiwan and Ireland - have all experienced major threats to their national existence which gave their homogenous populations a seriousness and anxiety which facilitated the hard political tradeoffs required.

While the U.S. preached non-intervention, it practiced the biggest state interventions of all: the Pentagon built the infrastructure of the modern knowledge-driven economy for strategic purposes. The U.S. heavy investment in science and engineering education was driven by Sputnik; computers by the military needs of code-breaking and nuclear warfare; the Internet by the need for a communication network that could ride out nuclear attack. In fact, the Pentagon won the Cold War by thus launching an Information Age in which the Soviet Union's Steam-Age design was obsolete.

Barriers To A National Technology Strategy

By contrast, New Zealand's national economic strategy has been hyper laissez faire, ensuring total transparency (unfortunately revealing no activity) and a level playing field (unfortunately revealing no players). This approach has been due to:

• Over-reaction to the failures of state intervention in the completely different arenas of import protection and income redistribution.

• Geographical isolation and rich resources meant that there had been no mortal threats to the nation, hence, no tradition of focussed national strategies for survival. New Zealand excelled in social leadership (early vote for women, early design of the welfare state), not economic leadership.

• Strong lobbies for welfare and ethnic groups precluded a national strategy that would create major winners and losers along cleavages orthogonal to those that already existed.

• No benchmarking by closely comparable neighbours, a role only recently assumed by Australia.

By now, it is difficult for New Zealand to switch strategies, since the public is exhausted by rapid changes which have left unresolved the underlying economic problem: dependence upon agricultural commodities.

Neither the New Zealand public nor New Zealand universities have caught up with the role of universities as engines of growth. The dynamic interaction between nerds and capitalists drives Silicon Valley and the Internet. In New Zealand, both groups are suspect, not only to the general public, but also to each other. On the backs of sheep, New Zealand was set up as a socialist paradise by refugees from the British working class, who suspected - rightly - that universities focussed on elitist rubbish. University staff have absorbed both this ethos and the elitist rubbish, fluctuating between their roles as chic social consciences and disinterested scholars. Exiting the ivory tower for mere cash is foreign to both roles. Moreover, socialist tradition, both outside and inside the universities, limits the differential adjustment of salaries across faculties to levels that are competitive internationally. The New Zealand public would find it difficult to accept salaries for the best professors higher than for the head of government, as in the U.S.

Its egalitarian ethos leaves New Zealand with the worse of both worlds: it maintains equal access to education, which identifies the talented, but then pushes them out with low salaries and high tax rates. Low academic salaries mean that in New Zealand the clever are not greedy and the greedy are not clever. Yet, it is clever, greedy people who create a Silicon Valley.

Globalisation And Hypercompetition Of Nations

Business firms today face accelerated competition:

• In 1990-1995, the top managers of 20 corporations in the Fortune 100, including IBM, General Motors, and American Express, were ejected by institutional shareholders for poor performance.

• In 1997, Barings, the world's oldest private bank was bankrupted by a few weeks of reckless derivatives trading by a lone 28-year old.

• In 1998, the heads of several of the world's largest banks lost their jobs for failing to anticipate multi-billion dollar losses in Russia.

• By 1999, the Internet had turned 19 bright aggressive young men into billionaires. One joined the ranks of the 400 richest persons in 18 months.

This acceleration of competition is driven by both technological and ideological forces:

Moore's Law (that the density of transistors on microprocessors doubles every 18 months) has led to drastic falls in the cost of financial transactions, thence to the globalization of capital markets, thence to incessant international comparison of rates of return. Moreover, the rise in computational power leverages high-quality brains, rendering obsolescent not only blue-collared brawn, but also increasingly-higher echelons of white-collared brain. The rise in the relative value of top brains has led to the globalization of the market for skilled labour, hence to salaries which reflect global relative scarcities for skills.

Free market ideology has been riding high in a drive to extend the reach of the market by defining, clarifying, formalizing and strengthening ownership rights and facilitating their market exchange to elicit underlying values. This drive has reached state-controlled sectors (deregulation), corporations (mergers and acquisitions), future monetary payoffs (financial derivatives).

These stronger, faster processes of competition now confront, not just corporations, but whole nations, via the globalization of the markets for technology, capital and skilled labour. A nation's policies, must now address not only its captive citizenry, but also the invisible herd of international financiers, whose ill-informed stampedes can crush a nation's exchange rate and starve it of short-term capital.

Such hypercompetition confronts a nation with problems beyond those faced by a corporation:

• A nation that mismanages its human and physical assets cannot be taken over nor shut down. Ultimately, sovereign debt is unenforceable.

• A nation cannot dispose of non-performing assets, nor sack its citizens.

• The leaders who are ultimately responsible for managing the economy are not selected or rewarded just for their management skills.

• A nation cannot adapt to accelerated market processes by "delayering", "restructuring", or "continually reinventing itself". It is stuck with a culture and political institutions which can be changed only on a time scale of generations.

All these rigidities are illustrated by the collapse of Russia as it attempted an overnight social, political and economic transformation. The most obvious consequence of its failure at hypercompetition is its default on government bills, and the exit of international capital. A more serious long-term problem is demographic degradation: the clever and criminal have looted the nation and left, followed by the clever and non-criminal (in enough numbers to transform Israel into a hi-tech centre), while the life expectancy of the rest has dropped to that of Kenya.

Hypercompetition is now separating out the twins amongst the four original Asian Tigers.

Singapore is succeeding in a swift national/corporate transformation in response to the Asian financial crisis. It has deregulated and merged its financial markets and invited in international banks to force an upgrade of its banking system. It is even shedding its repressive political culture, recognizing that this is a barrier to the creativity needed for hypercompetition.

By contrast, Hong Kong is hampered by being a wholly-owned subsidiary of a much larger entity, whose top management is competent, but chronically overloaded by much larger problems. Its market-driven approach to high technology has been hijacked by real estate tycoons seeking to exploit the hype. Lacking scale, research depth and focussed government leadership, Hong Kong is being left behind in the technological race by Singapore, which is attracting away international corporations.

At the next scale, Korea seriously over-extended itself in a state-led expansion into numerous new industries that brought about an economic collapse into the incompetent arms of the IMF. By contrast, Taiwan has sustained individual entrepreneurship and open capital markets. It has attracted back enough expatriate entrepreneurs from Silicon Valley to set up its own version in the Hsinchu Science Park.

On the largest scale, Japan was the first hypercompetitive nation. MITI's administrative guidance mobilized national energies in technological and organizational innovation. Its "laser beam" approach brought rapid world dominance in a succession of key technologies. However, the Japanese model has faltered. MITI initiatives in Fifth Generation computing and high definition T.V. failed. A botched monetary policy led to a financial bubble whose collapse led to a decade of slow growth.

The U.S. As Hypercompetitor: The Bland Leading The Bland

The U.S. style of hypercompetition is the opposite of Japan's. It enjoys advantages that even other Anglo-Saxon nations cannot replicate:

• Its continental-scale economy holds the world's best opportunities and attracts the world's most talented, ambitious and venturesome people.

• It has the world's largest, most efficient capital market, attracting from around the world both risk capital and capital seeking a safe haven.

• Corporate behaviour is controlled, not only by effective regulatory authorities, but on a decentralized, continuous basis by the threat of class action lawsuits with no downside risk, since victorious defendants are usually not awarded costs and legal entrepreneurs are willing to charge only contingency fees.

• It prints the global medium of exchange, so its government bonds have the highest rating by definition; hence it has much greater scope for running balance of payments deficits.

• The rich are not envied (they have no fun and have to give their money away); the middle class blame themselves for lack of success in an open competition; the poor, who seek escape from their failures in drugs, are in prison. Hence, the U.S. can pay salaries for skills that reflect global scarcities.

Thus, the U.S. undermines the ability of other nations to achieve alternative reward structures by protection, taxation and welfare support. Such actions would lead to the exit of capital and talent to the U.S. This poses a special problem for small nations open to human asset stripping, which could be trapped in a low-level equilibrium by their cultural and political constraints: low salaries lead to the exit of the talented people who could provide the leadership which would provide the economic strength to raise the salaries. Meanwhile, the U.S. would enjoy cumulative increasing returns to scale in knowledge, as its growing mass of talent and venture capital fed on the rest of the world.

The U.S. succeeds at hypercompetition because there, social and cultural relationships are replaced by legal and market relationships. The diverse migrants to the U.S. leave behind their national cultures to join a supra-nation with all the blandness of a mainstream television channel. The middle class masses transact mostly with the franchisees of national chains that have maximized shareholder value by designing and branding consumption packages which address common denominators of the mass. At high incomes, those who grew up in richer cultures often take their money and run from the sheer boredom. The other notable success at hypercompetition - Singapore - is the polar opposite of the US in size and politics but is strikingly similar in its blandness: no-one actually wants to live there either. This correlation between hypercompetitive success and national blandness points toward a strategy for New Zealand, which can hardly avoid becoming a talent colony of the US, but can shape its colonial fate.

Begorrah, Kia Ora?

Consider again the contrasting fates of those two proto-colonies of England: why did Scotland succeed where Ireland failed?

1. Unlike those Irish papists, Protestant Scots were trusted by the English, so they could piggyback on the success of the larger British nation of which they formed an integral, yet distinctive part. Talented Scots slotted easily into Sassenach world-class institutions and thereby leveraged their talent.

2. Unlike Wales and Ireland, Scotland developed an education system as good as, but different from, Oxbridge. This nurtured talent at home through the formative university years, when bonding with the wider society takes place. The Scottish Enlightenment, featuring David Hume, Adam Smith and Adam Ferguson, was based on Glasgow and Edinburgh Universities.

3. Scotland retained the loyalty of its people through a distinctive geography, history, and national character. From Sir Walter Scott's Waverley Novels and Victorian nostalgia, it created its own mythology of tartan, kilts, bagpipes, haggis, clans, and Highland Games. This mythology had the conviction and appeal to keep enough Scottish achievers in Scotland to build a critical mass in many fields. When Scots like Andrew Carnegie succeeded abroad, they brought their capital back to Scotland.

This suggests the following agenda for New Zealand.

1. New Zealand should remain connected with the wider Anglo-Saxon world and facilitate the flow of ideas and talent back and forth, avoiding a sullen self-absorption clasping mythical substitutes for achievement or excuses for failure.

2. It should invest whatever it takes to build an education system that is world-class in quality, yet distinctive in character.

3. Efforts to build national pride and a distinctive character by support of the arts or by celebrating the culture and achievements of indigenous peoples, are not only consistent with, but are crucial for, long-term national success in the hypercompetition of the Information Age.

During the recent Re-Colonization period1, this strategy of close engagement with a successful larger entity, while remaining a distinctive unit permitted New Zealand to become a Greater Britain of the South - and thereby one of the richest of nations in both income and talent, despite being a colony.