Protectionism ensures slower growth

An interesting article in Forbes by Jeffrey Dorfman, a professor of economics at the University of Georgia. USA , is (mostly) copied below

Tariffs help uncompetitive industries:

  • They put a penalty on imports in the form of a tax
  • Domestic producers that would otherwise lose market share to imports are able to produce more and find domestic markets for those goods
  • This maintains jobs in the protected industry
  • And, by keeping factories open, it also means more capital stays in the industry benefiting from the tariffs

These outcomes are pretty much the point of the tariffs, but they impose both obvious and hidden costs on the economy

The obvious costs are twofold:

  • First, consumers of the products sold by the protected industry must pay a higher price thanks to the tariffs
  • Second, jobs and profits are lost in the rest of the economy because the higher prices induced by the tariffs leave less money to be spent on everything else

These costs have been much discussed during the recent ramp up in trade disputes and tariff levying

What has been mostly overlooked is a hidden cost of tariffs – slower economic growth

At any given time, the US economy has a certain amount of capital to invest in productive activities – tariffs protect uncompetitive businesses from shrinking or going bankrupt – because these protected industries are larger with the tariffs than without them, more capital is trapped in those low-growth or shrinking sectors of the economy benefiting from tariffs – that lowers the average return on capital

Without tariffs, those industries would shrink, and capital would be reallocated to faster-growing parts of the economy

This reallocation of capital would boost aggregate output thanks to the faster growth and mean there would be more future capital to invest in other productive uses

Economies with more capital have higher economic growth and higher wages thanks to the productivity derived from that capital

Thus, removal of tariffs would boost economic growth and create a feedback loop that would keep economic growth accelerating

Protectionism doesn’t just mean current economic losses from both the taxes and the disruption of rearranging global logistic networks – it also means slower growth for as long as certain industries are protected

This effect compounds over time, growing for every year protectionism continues and protected industries remain larger than optimal

One thing markets are good at is allocating capital

Sure, they make mistakes and those investors lose money – sometimes, when enough bad capital allocation decisions are made, we get recessions

However, markets do a better job than politicians of choosing which industries to protect from foreign competition

More tariffs mean an inferior capital allocation, a lower average return on capital, and thus slower economic growth

A good analogy is the bailout of banks and automakers by Presidents Bush and Obama during the last recession – by trapping capital in the low-growth industries of auto manufacturing and finance, the bailouts contributed to the slow growth of the US recovery – if capital markets had been allowed to adjust more fully to the over-investment in those two industries, growth could have been faster and the recovery quicker

Tariffs thus cost the economy jobs because the costs imposed on the rest of the economy outweigh the gains awarded to the protected industries

Unfortunately, that is not the end of the story – it gets even worse

Because tariffs cause capital to be mis-allocated, we suffer lower economic growth in both the short and long run

When you look at the big picture, tariffs are like an unwanted house guest that just won’t leave

Every day, the damage continues to increase and the effects linger even after the tariffs are removed

NZ shows way for public sector productivity

The New Zealand Productivity Commission was asked by its Government to provide guidance and recommendations on measuring and improving productivity in public services, especially education, health, justice and social welfare which play an important role in promoting individual and community well-being

The Commission interviewed multiple current and former senior state sector leaders, carried out case studies to demonstrate how to measure productivity in public services, and commissioned research to better understand how
innovation, the engine of productivity improvement, occurs and spreads in
public services

The Commission produced two final reports:

The following is their summary of their findings

Higher state sector productivity is critical to delivering more and better public services now and into the future, yet many government agencies lack the culture, capability and encouragement to make these gains

“Faced with demand for more services, the public sector often relies on hiring more people – that strategy is not sustainable” says Commission Chair Murray Sherwin

“Getting the best value out of existing resources requires good information, measurement of performance, openness to new ways of working, and an environment committed to making improvements”

“The Commission saw examples of good and innovative practices within the state sector. Examples include primary health care models which make better use of nursing staff skills to meet patient needs better and faster, and use of data to test which employment training programmes actually make a difference to people’s lives”

“But there are too many barriers to these sorts of practices emerging and spreading:

  • Few government agencies measure the productivity of their services
  • Some lack the capability or inclination to do so
  • Many are risk-averse and through prescriptive and inflexible commissioning arrangements, make it difficult for contracted service providers to innovate
  • The Government’s budget system tends to reinforce ‘business-as-usual’ activities instead of new and innovative approaches”

“Making progress on public sector productivity will require action by ministers, central agencies such as the Treasury, and departmental leaders”

In particular, Ministers need to start asking questions about productivity performance and setting clearer expectations for improvement – they should:

  • Establish and support a network to help build expertise in measuring productivity
  • Reshape the annual budget system to devote more money over time to high-quality initiatives that have a high probability of making a big difference to well-being, and less money to ‘business as usual’ proposals
  • Report annually on performance measures for key public services
  • Review existing public service funding models and where feasible, move to approaches that pay for results or outcomes, not inputs
  • Renew its processes for assessing the performance of state organisations, to test how well their cultures, values and practices support innovation

“This inquiry has demonstrated, through case studies and other investigations, that measuring and tracking productivity in public services is quite feasible”

Higher state productivity matters for better, sustainable public services – it allows a
community to have more or better services or lower taxes – it also contributes to
higher national productivity and, through that, to higher incomes and a larger tax base – and, as New Zealand’s people age, there will be more people
needing assistance and a smaller share of the population working and available to
provide services or pay taxes

However, there are seven major barriers to higher state sector productivity and available evidence, while limited, suggests recent state sector productivity growth has been poor:

Barrier 1 – Not enough demand for measures
It is difficult to understand and improve something that has not been measured yet
measurement of public service productivity is relatively uncommon – some agencies
do not ask the right questions or do not make good use of available information,
and politicians typically do not ask for productivity information

Barrier 2 – Hostility to measurement
Some who work in the state sector are hostile to the concept of
‘productivity’ or ‘efficiency’ in public services and resist its measurement – they argue that such measurement would be a distraction from their core business, or
have perverse impacts

Barrier 3 – Closed, risk-averse cultures in government agencies
Achieving productivity improvements in public services often means doing things
differently, such as using technology better – yet many government agencies are risk-averse, closed to ideas from outside and poor at managing change

Barrier 4 – Poor policy and commissioning practice
Effective commissioning ensures services are designed to best meet the needs of users but government agencies often take very conservative approaches to commissioning services, leading to ineffective delivery and waste

Barrier 5 – Restrictive rules and funding models
Innovation and productivity often depend on changing the mix of people,
technologies, and other resources used to deliver services – however, service units face rules or policies that limit their ability to make these changes

Barrier 6 – Few budgetary rewards for productivity
Annual budgets provide relatively little encouragement for productivity gains – the majority of existing spending is not regularly reviewed and a large share of new funding allocated goes towards ‘business as usual’ activities rather than new
and better approaches

Barrier 7 – Patchy monitoring, evaluation and data use
Finally, government agencies often make poor or little use of available data and
information which means they may not fully meet the needs of users or
officials may not know which services are ineffective, and need improvement

So the Commission recommend the following action to lift productivity performance
across the state sector

Action 1 – Set clearer expectations for productivity gains
Ministers can play an important role in lifting performance by setting clear
expectations for public services and demanding more information about productivity

Action 2 – Build the capability to measure, and measure more
Build up measurement capability within government agencies as this is currently weak – establish and support a network of capable officials to share experience and build expertise in state sector productivity measurement

Action 3 – Report on core public service efficiency
Much public sector information is not very useful for measuring changes in productivity – regular collection and publication of information on expenditure on key public services (e.g. annual per-client or unit costs for schooling, court trials etc.) would provide transparency needed and strengthen incentives on agencies and providers to seek ongoing improvements

Action 4 – Use performance measures wisely
There is a place for well-designed quantitative productivity measures in public sector performance frameworks, as they help provide a more balanced picture of performance

Action 5 – Raise the bar on new spending in the budget
The Commission recommends a set of reforms to increase the rewards
for productivity and service improvements:

  • Set aside a share of each year’s allocation of new funding for initiatives that have a high probability of making a significant impact on social well-being, and gradually increase this share over time. To qualify, these initiatives would need to have robust business cases, strong supporting evidence and clear evaluation plans
  • Tighten the link between past performance and future allocations from the budget. The annual budget round is supposed to test how well agencies have used their existing resources, but has lacked consequences for poor past performance. Agencies should only be able to access the ‘high impact initiative’ share of the budget allocation if they could credibly demonstrate they had made productivity gains from their baselines
  • Retain and strengthen a separate avenue for organisations outside the public service to make budget bids. Non-government organisations and the private sector are important sources of innovative ideas and processes, but can face hostile or unreceptive public agencies. Allowing these organisations to make proposals directly, without the approval of departments, removes roadblocks and exposes ministers to a wider range of ideas and proposals
  • Pay for results, not inputs – In many core public services, funding models encourage increases in inputs (e.g. staff) or volumes (e.g. student numbers). These models provide certainty for providers and can support access, but offer limited rewards for innovation, are often restrictive and can have perverse impacts. By comparison, results or outcome-based funding models provide more flexibility and more incentive for productivity gains

Conclusion – One can’t help thinking Professor C. Northcote Parkinson would agree with much of what they say

P.S.1 – One could substitute UK for NZ in all the above and the messages would still be the same

P.S.2 – Hence, there are many good lessons the UK, and others, could learn from it

P.S.3 – The UK still has no equivalent to the NZ Productivity Commission to come up with such weighty reports – our media should be forever banging a drum for ministers to create and support one, and encouraging tax-payers to ask “WHY NOT?”

Knowledge Indices

Developed economies are now ‘knowledge economies’

Knowledge has become the most valued input resource on which national growth depends – it’s needed for such as:

  • Entrepreneurship
  • Innovation, R&D
  • Product, process and software design

That said, a World Bank report claims that most nations fail to realise the knowledge they have available to them and so the potential they have to build on their strengths , become more competitive and improve growth and welfare

The bank defines ‘four pillars of any knowledge economy’, and three performance measures for each, which enable any country to understand its strengths and weaknesses, and those of its competitors – they are:

  • Economic and institutional regime – to provide incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship:
    • Tariff and non-tariff barriers
    • Regulatory quality
    • Rule of law
  • Education and skills – to enable people to create, share and use it well:
    • Adult literacy rate
    • Gross secondary enrolment rate
    • Gross tertiary enrolment rate
  • Information and communication infrastructure – to facilitate the effective communication, dissemination and processing of information:
    • Telephones per 1,000 people
    • Computers per 1,000 people
    • Internet users per 1,000 people
  • Innovation system – i.e. firms, research centres, universities, think tanks, consultants etc. – to tap the growing stock of global knowledge, assimilating and adapting it to local needs, and creating new technology:
    • USD royalty payments per person
    • Technical journal articles per million people
    • Patents grated to nationals per million people

The World Bank says that putting numbers to each of the above allows a country to identify problems and opportunities it faces in becoming a knowledge economy

And that’s where the trouble starts – in order to impress the academically-minded, we’re told: “Comparisons are based on 83 structural and qualitative variables that serve as proxies for the four pillars – and all 83 are normalised”

And headline findings are:

  • “Denmark is the world’s most advanced knowledge economy, followed by Sweden, Finland and the Netherlands”
  • The USA is eighth
  • The UK is nowhere

At this point, and despite allowing for possible bias in my judgement, nagging doubts about the four pillars and 12 performance measures start to emerge

But we are assured that the bank’s KAM – Knowledge Assessment Methodology – is: “Consistently measured, and regularly updated from a variety of sources”

Not only that: “It offers ease of use, transparency and accessibility” – and “It has been widely used by government officials, policy makers, researchers, representatives of civil society, and the private sector” – so that proves it must be OK

Whether it paints the right picture goes without question – at least by the bank

And how come India has a different NKI – National Knowledge Index – an alternative covering eight different variables which aims to highlight India’s competitive edge in the international market – the variable headings are:

  • Overall economic performance
  • Economic regime
  • Governance
  • Innovation system
  • Human capital, culture, skills and competencies
  • ICT and infrastructure
  • Current knowledge position
  • Knowledge competitiveness index

Each is defined in detail by several factors so that, overall, a total of some 100 are involved – and some make one dizzy just trying to understand them – hence, it means the aggregated value of this NKI is meaningless and so useless to all

The problem with both the above indices is that, in the absence of anything else, leaders grab at anything available to help them make important decisions affecting the population – even if it’s seriously flawed

It’s the old story rewritten about nature abhorring a vacuum – economists also abhor a vacuum – so, at national economic level, they’ve come up with GDP to fill the gap and guide our leaders – and now we have this new gap requiring a new star for our wise men and women to follow

Who knows where we’re heading?

Boeing seek at least 20% improvements, not 1-4%

Dennis Muilenberg is CEO of Boeing, the US’s leading aerospace and defence company, and the US’s biggest exporter – they employ 140,000 people in some 65 countries

An article by J P Donlon says Muilenberg is ‘on a tear to find another gear to compete in an increasingly complex, global and interconnected world’



  • Worldwide commercial airplane passenger growth is 5-6% per year – with growth in China and India as much as 15% p.a.
  • Every year in Asia, 100 million people fly for the first time on an aircraft
  • Barely 20% of the world’s population has ever flown
  • It’s a $7.5 trillion marketplace over the next 10 years

Hence, Muilenberg says: “Incremental productivity improvements of 1-4% a year will not allow us to compete in the future – we are focused on step improvements of 20-90% increments in some of our key value chains

He’s relying on technology unlocking such productivity gains and on finding growth in new parts of the value chain

Production of 737s has already been increased to 42 a month at its Renton, Washington factory which originally had a capacity of only 17 a month – and the plan is for 57 a month in another year

Four big ideas underpin such improvements viz:

  • Commonality – of major subsystems and parts used in different aircraft – “an aircraft is a million parts flying in close formation – and it has to work every time”
  • Automation – of many tasks e.g. a device now drills holes and places thousands of fasteners in their 787 Dreamliners that had previously been done manually – this once took five days, now one, more accurately, and reducing costs
  • Customisation – using 3D printing, Boeing can now offer customers specific features that uniquely differentiate their aircraft
  • Digitising operations – using data analytic engines, they now monitor and control operations on the plant floor and boost efficiency – flow times have been cut by up to 90% alongside significant improvements in first-time quality

However: “The people who make the (above) four work are the people who build the planes – they have the best ideas, they know what works, so we put them into their hands and they surprise us every time”

In addition, they encourage staff to come up with thousands of ideas for more change within Boeing: “The current pipeline has over 2,000 ideas in it right now that we’re just moving our way through and implementing”

Muilenberg also emphasises the need to think about the end-to-end lifecycle of how products are designed, built and then supported – and about improving manufacturing capability around the world ‘to grow the pie and add jobs to increase competitive advantage’

Hence, Boeing continue to grow their supply chain presence overseas viz:

  • They build parts for the 787 in Australia
  • They manufacture Apache attack helicopter fuselages in India
  • They have a finishing centre in China which takes delivery of 737s built in the USA and supplies seats and paintwork for local customers

Overall, Muilenberg says:

  • Competitiveness is a big deal to us, so cost and quality are important
  • The ability to deliver reliably is also critical
  • We look for teammates willing to make targeted investments in digital transformations that’s good for them and good for Boeing
  • And the most important challenge we face is building the future talent pipeline – future engineers and manufacturers – the US is woefully short of STEM qualified people who know about these leading-edge techniques so there’s big investment in hands-on learning, vocational training and engineer re-training

So where next?

Areas where Muilenberg expects change over the next 20 years include:

  • Getting to the airport
  • Processing people through the airport and getting on the plane
  • Dealing with security
  • Propulsion technology – electrically powered airplanes, maybe flying taxis
  • High-speed flights becoming more economical – so one can fly anywhere in the world in one or two hours on supersonic/ hypersonic aircraft
  • Low-earth-orbit space travel
  • Low gravity manufacturing in space becoming practical
  • Before 2030, we’ll put the first person on Mars – and he or she will get there on a Boeing rocket

But, as Mandy Rice-Davies once famously said: “He would say that (last point), wouldn’t he?”


ICT for processes – Pearls from Gates

Bill Gates, founder of Microsoft, suggested the following applications for ICT – Information and Communications Technology

For knowledge work:

  • Insist that communications flow through the organisation over e-mail so that you can act on news with reflex-speed
  • Study sales data on-line to easily find patterns, share insights, understand overall trends and personalise service for individual customers
  • Use PCs for business analysis, and shift knowledge workers into high-level thinking work about products, services and profitability
  • Use digital tools to create cross-departmental virtual teams that can share knowledge and build on each other’s ideas in real time, worldwide
  • Use digital systems to capture corporate history for use by anyone
  • Convert every paper process to a digital process, eliminating administrative bottlenecks and freeing knowledge workers for more important tasks


For business operations:

  • Use digital tools to eliminate single-task jobs or change them into value-added jobs that use the skills of a knowledge worker
  • Create a digital feedback loop to improve the efficiency of physical processes and improve the quality of the products or services created
  • Every employee should be able to track all the key metrics
  • Use digital systems to route customer complaints immediately to the people who can improve a product or service


For commerce:

  • Trade information for time
  • Decrease cycle time by using digital transactions with all suppliers and partners, and transform every business process into just-in-time delivery
  • Use digital delivery of sales and service to eliminate the middleman from customer transactions – and if you are a middleman, use digital tools to add value to transactions
  • Use digital tools to help customers solve problems for themselves
  • Reserve personal contact to respond to complex high-value customer needs


All managers should take note

As Andy Grove of Intel said: “In the future, all companies will be internet companies” – so managers who are not ICT/ digital literate will be left far below