Wednesday, 12 March 2008

Innovation fund (updated x2)

This report tells us that the government is planning
A massive funding boost to New Zealand's food industry [which] aims to help sell more of the country's produce overseas.
The idea is that
The innovation fund will target pastoral and food industries in an effort to make New Zealand's products more attractive to international markets.
But why spend taxpayer money on this? Is the government trying yet again to pick winners? If New Zealand has a comparative advantage in this area, as we may well have, then why is this money necessary? Why can't the firms involved, like Fonterra, fund such development themselves? Those in the industry have the best information as to what is most likely to be profitable in the future and forcing them to fund development themselves gives them the strongest incentives to develop the best available options. If they are unwilling to do so then doesn't that tell us that they don't believe such innovations are worthwhile.

Also if the government wishes to help industry why this particular way of doing it? Would it not be better to return an equivalent amount to firms via a reduction in the corporate tax rate and let the firms themselves decide how best to use the money. As note above, the firms in the industry have the best information as to what is likely to be the best strategy for the future. Let them decide on their strategy and back it themselves.

There is also the issue of what criteria have been laid down to determine whether the policy has been a success or failure. I'm guessing there are none. There never are with government policy.

On the other hand if New Zealand no longer has a comparative advantage then surely the last thing we need is taxpayer money being used to artificially prop up a sunset industry. Better to let the market work to signal to those in industry to move out of the sector.

There is also the issue that these funds seem to be aimed toward exports. Is this another example of a mercantilist mindset in government. The exports good, imports bad view of the world. Adam Smith showed the shortcomings of such a view more than 200 years ago, it would be nice to think the New Zealand government wasn't that far behind the times.

Update: Not PC comments here, Innovation fund isn't.

Update 2: A friend has just emailed me to point out that if you don't like current account deficits, or capital account surpluses, then increasing exports is "good". Remember more exports "helps" the trade balance, which in turns "helps" the current account balance and governments seem to think a current account deficit is "bad", very "bad".

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