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Prime Minister Christopher Luxon has met with US President Donald Trump on the sidelines of Apec. Photo / Pool

New Zealand’s long-term productivity problem has been a preoccupation throughout our recent history, but what if part of the problem is that we have taken the lessons learned from history too far?

This debate can be understood as being shaped by two paradoxical mindsets. The first is New Zealand’s persistent disillusionment with our relative economic performance and the failure of various attempts to close the gaps to our OECD peers. The second is an often close-minded adherence to a view of which policies work and which do not.

As I argued in a chapter in the recent Helen Clark Foundation book, Facing Up to Our Future, there is a need for New Zealand to think differently about what role the state plays in shaping economic development. In part, this is because the challenge goes well beyond just dealing with our underperformance on productivity.

When right-wing populism has taken root overseas, it has done so in areas where people have not been provided economic opportunities, and the sense of dignity and security that good jobs provide. An environment where citizens feel a loss of control amid economic and technological shifts is one in which the foundations of liberal democracy themselves are at risk.

Deep global integration means that New Zealand shares in the benefits of the global trading system, but it also means that bad things arrive on our shores much more readily. In the years since 2020, this has included a global pandemic, Covid-related supply chain disruptions and energy market shocks associated with conflicts in both Ukraine and Iran. Disengagement from the global economy is not an option for New Zealand, but our policies do need to take account of how to build more resilience amid a global system that looks increasingly volatile.

One area that New Zealand firmly consigned to the discard pile of economic approaches is industrial policy, or what is commonly referred to as ‘picking winners’.

Industrial Policy is an approach focused on the transformation of the economy toward particular objectives – often a more innovative or productive economy, though industrial policy has increasingly been directed toward other goals such as decarbonisation or national resilience.

For some commentators, the failure of 1980s-style liberalisation is always a matter of not going far enough with this project. When the promised growth fails to eventuate, the answer always seems to be that there is some further area that needs cutting or deregulating.

We can understand a free-market approach as being about getting Government out of the way, removing barriers and minimising taxation in the hope that the resultant economy delivers what is important to people. In contrast, industrial policy starts with an idea of what we want the economy to deliver. It then prescribes a more active role for the state in pursuing those outcomes, through working in partnership with businesses, unions and others, and consciously supporting some activities ahead of others.

The post-WWII rules-based international order seems to be fraying by the day. Yet one constant that we have observed throughout the fluctuations in US international policy has been a renewed focus on industrial policy – while displaying both its promising and its troubling aspects.

The Trump administration’s approach to industrial policy has been explicitly nationalistic and protectionist, making or extracting deals with specific companies for US-focused investment and treating international trade as a zero-sum game where foreign imports are counted as a loss. If critics were ever short of examples of what can go wrong when the state is actively involved in directing economic development, the Trump administration has ticked practically all of the relevant boxes.

The end of Trump’s first term saw a Biden administration that instead wanted to use the power of the state to drive a green transformation. Bidenomics was also focused on more inclusive economic growth, motivated by the perceived loss of economic opportunities among the working class. The signature achievement of this agenda was the 2022 Inflation Reduction Act, a somewhat misnamed package of measures that was largely focused on investment in green technology and decarbonisation through carrot-rather-than-stick incentives for businesses and households.

But what did not change with Trump’s loss in the 2020 election was that the US remained noticeably sceptical of its previous embrace of globalisation and free trade. Biden administration officials talked openly about viewing trade liberalisation not as an end in itself, but as something to pursue to the extent that it was consistent with a domestic agenda of green transition, job creation and national resilience. The Biden administration was also explicit about the industries that it wanted to maintain control over ahead of China, such as semiconductors.

We can see some stirrings toward renewed thinking on industrial policy in the Ardern Government’s work on Industry Transformation Plans, in Labour’s more recent announcement of New Zealand Future Fund, and in the Green Party’s focus on a Green Industrial Strategy.

Shifting away from a mindset that government should leave things to the market does not mean jumping to a position that government has all the answers. A strategic approach to industrial policy should be one in which we are clear about the ends that we are trying to achieve but flexible and adaptive as to the means of doing so. Government should be engaged and aware of relevant barriers that businesses face, without falling into the trap of being subservient to business.

Thinking around the world has shifted toward much greater interest in industrial policy. At the same time, the world has become a more challenging and hostile place for positive-sum international co-operation and working together to solve major challenges. If New Zealand is to build the sort of economy that truly works for all New Zealanders, this should start with a conversation about whether this aspiration can credibly be left to markets to deliver.

Toby Moore is a member of the Labour Party’s policy council. He previously was a senior adviser to former Finance Minister Grant Robertson. These views are his own.