The Brendan Thompson Prize for International Economics

This entry was posted in History of Ideas, Methodology, Philosophy on 8th April 2008 by Brian Easton.

The Waikato Management School annually awards a prize in memory of Brendan Thompson to the to student in the international economics course. After I gave the 2008 prize to Nicole Gray on 8 April, 2008, I was invited to make a short speech:

Keywords: History of Ideas, Methodology & Philosophy;

Brendan Thompson’s first university, the University of Canterbury, has a Latin motto from Virgil, ergo tua rura manebunt which translates loosely to ‘so shall these fields be yours forever’. I have always thought it a good one, because it says to that university strives to give its graduates something which will affect them for the rest of their life. By his commitment to teaching, Brendan showed he believed the principle too, not only for his students at the University of Waikato, for Brendan was also involved in teaching the wider world through the media.

Recently I have been reminded by Brendan of a further meaning of the motto. A university is also committed to research and scholarship. Brendan was a scholar who did meticulous research on the early occupational structure of New Zealand. Ten years later – and forever – that work is there for researchers. This month I am using some of it for two separate projects: a paper on the New Zealand Wars and a contribution on the structural change of the economy for Te Ara, the online encyclopaedia. The university prize in his memory is evidence that Brendan’s fields remain for his students and for all researchers – forever.

Is There a Place for New Zealand in a Globalising World?

This entry was posted in Globalisation & Trade, Literature and Culture, Political Economy & History on 7th April 2008 by Brian Easton.

A Spirited Conversation: 7 April 2008.

<>Keywords: Globalisation & Trade; Literature and Culture; Political Economy & History;

<>When I began the study which led to my book, Globalisation and the Wealth of Nations, I assumed that ultimately globalisation would destroy nations. I knew that globalisation had created the modern nation-state, which hardly existed before the beginning of the nineteenth century. It was driven by the falling costs of distance, which not only brought countries together – so that Britain is less than a couple of days from New Zealand by air, a couple of milliseconds electronically – but it also led to the integration within nations, as it became easier for citizens to connect, making it a greater challenge to control them and yet easier to reach them.

<>But if the costs of distance continued to fall, would not the same processes lead to an integration of the citizens in different countries, and eventually lead to a world government? Perhaps ultimately that will happen, but I am reasonably confident that it will not happen in the lifetime of most of this audience. The reasons, set out in the book, are complex, but they are symbolised as to what is happening in Europe. Given its size and population density one might expect it to succumb to the integrational forces of globalisation; and indeed there is the rhetoric of the European Union becoming the United States of Europe.

<>Yet the forces of nationalism remain a central part of the EU story. Certainly there are integrationist forces, in economic policy and migration, but the political structure and practices leave considerable power in the hands of individual nation-states. The EU is unlikely to become like the United States of America, whose constitution was established before the existence of the modern nation-state. The thirteen foundation states, not nation-states at the time, had neither the power nor the presence to resist the federalisation of America despite, ironically, many preferring a confederation similar to that of the European Union.

<>The point is nicely illustrated by the fact that the states of the USA do not have foreign missions, and as a general rule their governors are not knowledgeable about foreign policy, as is often illustrated when a governor runs for president. Every nation-state of the European Union has a foreign minister, and they have different foreign policies as indicated by the split in the EU in response to such issues as Iraq.

<>Nevertheless, the EU well demonstrates an important trend of globalisation: the increasing inability of nation-states to control economic policy where border transactions are involved. Globalisation and the Wealth of Nations sees such institutions as the WTO, the Doha Round of multilateral trade negotiations, and free trade agreements as the political economy consequences of the falling costs of distance, rather than the independent drivers. The consequence of trade between partners is a rule of law framework, and in order to avoid complexity while maintaining a sort of equity, unrestrained trading relations tend to be the lowest common denominator. Nation-states are no longer able to close off their domestic economies from the commercial actions of other economies.

<>Initially I saw this increasing impotence as leading to the demise of the nation-state. My Nationbuilders book argued that economic policy was central in the development of the New Zealand nation-state from the 1930s to the early 1980s. If an independent policy became impossible, as for instance the Rogernomes argued in the late 1980s and 1990s, what was the future for the nation-state?

<>Part of the answer is implicit in the economic policies of the last decade, and evident throughout the world. This Labour-led government has still found ways of influencing the economy positively, ranging from sound macro-economic policy, supporting research, science and technology, promoting the acquisition of skills and education, building infrastructure, and of course public expenditure and distributional policies. It is only harder, not impossible, to run an economic policy without the border protection instruments, as this government has shown.

<>Indeed Labour has gone a step further in its commitment to the Doha Round and free trade agreements. What is going on here – as discussed in Globalisation and the Wealth of Nations – is an economic growth strategy built on the identification of specialisation, economies of scale and the economies of agglomeration plus technological innovation. The essence of the government’s economic policy is what I called in an earlier book of that name, ‘open growth’: national success requires engagement with the rest of the world.

<>Now it is not my task here to defend or explain the government’s economic policy, but what I have done I hope, is suggest that the destruction of independent economic policy in a nation-state is not inevitable even though there is a far less ability to control border policy today.

<>However, the survival of the nation-state cannot depend upon such a negative conclusion. It requires positive reasons for existence. The book groups them into two:

<>The first reason is that those who belong to a particular nation-state must have a sense of identity with the others who belong, and with the state as a whole; the second reason is that the nation-state must be able to deliver services to individuals so there is a purpose in their belonging to it.

<>The second reason can be explained more readily than the first, so let me do so briefly. The modern nation-state supports its citizens’ education and acquisition of skills, it reduces the insecurities of poor health, old age, unemployment and other adverse events, it nurtures its young not least because it requires them as future citizens, it promotes economic development, it protect’s the nation’s interests, and it promotes the national culture and heritage.

<>This last function is part of the response to the first issue of giving a commonality to the citizens of the nation. I shall give the rest of this paper to this topic because it is a large and difficult one, although extremely important.

<>Globalisation and the Wealth of Nations discusses two sorts of cohesion strategies. I am going to read a section at the end of Chapter 12. The chapter is about Germany which is used as an example of the rise of nationalism in the nineteenth century, for there was no German nation-state before 1871 and hardly any sense of German nationalism a hundred years earlier except perhaps by the intellectual elite. Germany went on to a terrible sort of nationalism under Hitler, which the book calls ‘ethnic nationalism’ and which it contrasts with the admirable civic nationalism of post-war Germany, a nationalism which emphasises citizenship and political and social participation. The book goes on:

<>Aristotle tells us that society is not a market, because we can do business with foreigners; it is not a mutual security pact, because we can have military alliances with foreigners; it is not intermarriage, because one can marry a foreigner; it is not occupying the same territory, because neighbours can treat one another like the occupants of the same city can treat one another as if they were enemies; it is not doing no harm to one another, because one can be kind to foreigners. There must be a cherished way of life woven out of friendships, civic cooperation, and social pursuits; but even this is not enough, unless it is crowned by mutual moral concern among fellow citizens. All must be seen count as worthy of justice: none must be denied full political and social participation.

<>In such a society there is a sharing of common values, a sense of belonging to a community, and an allegiance to a nation which is typically, but not always, the nation-state of residence. A key common value for a civic nationalism is tolerance of diversity, a tolerance which perhaps makes possible the hierarchy of allegiances …

<>Even so, civic nationalism (or ‘positive nationalism’, as John Ralston Saul calls it) has a tension that cannot be easily resolved. Ethnic and civic nationalism might be thought of as analogous to Karl Popper’s closed and open societies. Ethnic (or ‘negative’) nationalism limits the possibilities for change in a manner similar to what occurs in closed societies. At its worst, the leader is an ideologue who claims to know absolute truth; and its crowds can be just as intolerant of difference. In an open society, nobody has a monopoly on the truth, different people have different views and different interests, and there are institutions that allow them to live together in peace.

<>Peter Munz cautions that open societies can be too open. Living together also involves common rules and understandings about how the members of a society are to function. Such institutions are integral to culture, yet their very existence limits the openness of society. (Consider the example of legislation against hate speech – an intolerance of intolerance.)

<>Often the rules and understandings entailed in civic nationalism are informal. They are never entirely rational; there is an emotional as well as a rational commitment to civic nationalism. … civic nationalism needs a mythic narrative to explain its heritage and future. (pages 83-84)

<>I want to apply these principles to New Zealand, which the book does not do because it is written for an international audience, even though New Zealand preoccupations loom large on every page.

<>I am going to focus on ethnic nationalism. There are parallel situations where the dividers are language as in Belgium, religion as in Iraq and Northern Ireland, and race as in Burundi and Fiji. Each instance might be an example of an opposition to civic nationalism, although the Belgians have shown the tensions can be overcome with toleration: one prays that the Northern Irish are learning the lesson.

<>The mention of race reminds us that ethnicity is different from race. While race involves a genetic and factual notion, ethnicity is self-ascribed, reflecting what people want to call themselves.

<>Our single most importance source of ethnicity data is the quinquennial Population Census. Unfortunately the census question gives no indication of what it means by ethnicity. Probably some people think it is a question about race, but others do not. Some people who say they are of Maori descent do not give ‘Maori’ as an ethnicity, and some who give Maori ethnicity say they are not of Maori descent, reminding us that ethnicity is not race.

<>(In passing I mention that it is not uncommon for other surveys to compare their responses to ethnicity questions in the census, even though they are asking different questions or coding the response in a different way. It seems likely, too, that people will code their ethnicity differently in different circumstances. We know that is true on death certificates.)

<>There is only one place in official New Zealand which uses the concept of race. You will find it in the Population Census, where there is a box where one ticks if one is of Maori descent. Since this is separate from the Census ethnicity question, it shows that ethnicity is not the same thing as descent or race. The decent question is used for deciding the number of Maori seats. Time forbids going through the story of why there are Maori seats – they were originally established to protect the interests of European settlers. The reason they are allocated on a racial rather than ethnicity basis is, I suppose, that descent is a fact testable in court, whereas ethnicity is much more attitudinal and untestable.

<>(Some think the Tiriti o Waitangi settlements are race based. They are not. They provide compensation to families who had great wrongs imposed on them in the past, typically by the seizure of their property without compensation. If the same thing happened to my Easton ancestors, my wider family would be demanding compensation too, although in our case we would have to go through a court or petition a select committee.)

<>The Census gives a number of ethnicity options to respond to, but there is also the option to write in a response. Many people use the option, and in the last (2006) Census around 15 percent of respondents wrote they were ‘New Zealanders’.

<>Unfortunately the census cannot give people the opportunity to explain why they respond in the way they do. Some of my friends whom I admire called themselves ‘New Zealanders’ in the Census, so I do not think we need necessarily think that response was as assimilationist as I shall describe shortly.

<>Indeed, if I am overseas and am asked my nationality, I reply ‘New Zealander’. But for the ethnicity question in the census I wrote in ‘Pakeha’ – I am certainly not a European, the offered option, except by descent. I choose Pakeha because it identifies me as a New Zealander, albeit one whose ways are affected by European origins. The term ‘Pakeha’ is used in the Tiriti o Waitangi, so it is a label has been used respectfully for 170 years.

<>The reason I answer the Census differently, is because the circumstances are different. I write in ‘Pakeha’ as an act of solidarity with those New Zealanders who think of themselves as Maori, or Samoan New Zealanders or Chinese New Zealanders or whatever. They are proud to be New Zealanders, as I am (usually), but they want to say that in various ways they see themselves as ethnically or culturally distinct from other New Zealanders. (Another place I use the phrase is a response to the follow-up question by a foreigner, who having been told I am a New Zealander, wonders whether I am a Maori. ‘No, I am a Pakeha’.)

<>What is worrying about the New Zealander census response is its assimilationist overtone. The assimilation versus integration debate occurred in the 1960s. The assimilationist group wanted the Maori to become like Europeans except for their brown skins. The outcome would have been a disaster, because the Maori have subsequently given us so much which was distinctive to them and has contributed so much to making New Zealanders distinctive from the rest of the world. The integrationist strategy, which was to acknowledge there were differences, to tolerate the differences, to respect them and to celebrate them, won out.

<>However it unintentionally led to biculturalism, which categorised New Zealanders into being Maori or non-Maori, and which tended to equate the non-Maori with those of British descent. Those who think of themselves as Samoan, Tongan, Chinese, or Indian New Zealanders get lost in biculturalism, but so do those who celebrate the Danish, Dutch, Jewish, or Polish in themselves. Even those whose background is Celtic – the Irish, Scots and Welsh – grumble that their differences are not sufficiently recognised, but subsumed under the English umbrella, and there are those like myself, whose background is Yorkshire and Somerset (and Irish), think too much weight is given to London English.

<>What a polyglot of cultural influences we New Zealanders are, and yet there are commonalities. For instance once we have been here for a couple of generations, we all sound much alike.

<>Civic nationalism tolerates these differences in a way that ethnic nationalism does not. Its aim is not to make us a people with one ethnicity, but to celebrate the differences and see in the mix a truth of the variety of New Zealanders in which there is a commonality so we can call ourselves New Zealanders, comfortable that within New Zealand our differences are recognised.

<>In a sense bi-culturalism is the new assimilationism. You must belong to one category or one other – Aryan or Jew in Hitler’s Germany – without any acknowledgement that there is also considerable diversity within each category.

<>The story of how we statistically trapped ourselves into this dichotomy is yet to be written. Let me sketch it.

<>Until about 1981, the Population Census collected on a racial basis which was jokingly called the ‘hydrological test’, because one was classified as Maori on the basis of proportion of ancestors who were Maori, so it was the proportion of Maori blood – hydrologically – which determined one’s race. The criterion was abandoned in 1986 in favour of self ascribed ethnicity.

<>Now some people want to give themselves more than one ethnicity. In the most recent census some people who wrote in ‘New Zealander’ and also said they were Maori, or Pakeha or Chinese whatever, which is a reminder that you cannot assume that the New Zealander category necessarily means ‘racist’. So the Census gives each respondent the opportunity to chose more than one ethnicity.

<>How do we count the multiple scores? Today, Statistics New Zealand simply reports all the responses, so its ethnicity statistics add up to 121 percent of the population, as a result of the double and triple recordings.

<>That is better than what it used to do. In the past there was a prioritisation procedure, which said that all people who called themselves Maori were classified as Maori, even if they said they were something else beside. Of the remainder, those who called themselves Pacific Islanders (but did not mention Maori) were classified as Pacific Islanders, even if they mentioned other ethnicities; then a similar thing was done for Asians (and a group of ‘other ethnicities’) ; and finally there was the residual of those classified as Europeans (including those of us who wrote in Pakeha) who did not mention any other ethnicity.

<>The overruling of individual choices on such a self-classified characterisation is ethically wrong. Statistically prioritisation of Maori skewed the statistics making the Maori group relatively larger and the European group relatively smaller. That skewing also appears in the ethnic forecasts. The claim that by around the 2050 year that ‘European’ (whatever that means) will be less than half the New Zealand population, ignores the use of the prioritisation rule, and that there are those who have called themselves Pakeha and Maori, or Pakeha and Pasifika, or Pakeha and Chinese and so on. In any case we are projecting forward not the fact of race, but the self-ascription of ethnicity, and who knows how people will describe themselves in 40 years?

<>A particular issue is the group who are prioritised Maori. We dont have the details for the 2006 census, but in the 2001 census only 56 percent of those who categorised themselves as Maori, said they were only Maori. That means almost half ascribed another ethnicity. The most common pairing was Maori-Pakeha with 5.6 percent of all New Zealanders giving that classification (and more coupling it with a third ethnicity). Nobody has looked at this group closely, but my guess is that we will find them demographically and socially different from the sole Maori and the sole European – perhaps between them. We need to think more about this group, for it is they and perhaps Pasifika-Palangi and even Chinese-Kiwi who are likely to be important in the future of New Zealand over the next few decades. This is not in any way to diminish the significance of those who describe themselves of sole Pakeha or sole Maori or sole Pasifika ethnicity. I am guessing these joint ethnicity groups are going to play a more important role in our cultural development than we currently think.

<>My impression is that the Maori renaissance – one of the things which a New Zealander must surely celebrate – has primarily depended upon those who describe their ethnicity as sole-Maori (although I recall once at an exhibition seeing an artist include in her whakapapa ‘Ngati Yorkshire’, which is one of my iwi). The Maori are, of course, our first peoples and are unique to New Zealand. As such, they offer a source of identity which is unique to New Zealand’s cultural development. Already we are drawing on it.

<>Moreover, the Maori renaissance is based on a melding of Maori and European culture, as a number of Maori artists make clear in their work. at the same time key Pakeha artists – Colin McCahon and Gordon Walters come immediately to mind – operating in the same melding tradition have done so much for New Zealand art. Indeed they contributed to the Maori renaissance.

<>But ultimately, the future is not Maori. If there is to be a single ethnicity in our future it is Maori-Pakeha. I hope there is not. To have the future depend on one particular ethnicity, even a mixed one, is ethnic nationalism rather than civic nationalism. It is the interaction and flux of the evolving ethnicities which holds the promise for New Zealand’s future.

<>I need, especially after some of the events of last week, to say a little about our Asian ethnic future. You will recall that it was predicted that there would be 790,000 Asians in 2026, or 16.6 percent of the total numbers of New Zealanders, allowing that there will be some double counting. This projection suffers from all the caveats I expressed earlier. Additionally it lumps all Asians – Chinese, Indians, smaller groups – together, and it includes those who do not have permanent residencies – say, visiting students – with others.

<>When the figures were released, some concern was expressed at the future size of the Asian population, and we had a desultory debate on the issue – almost all of which was uninformed and some of which were close to moderately racist.

<>Now it seems likely that migration into New Zealand will continue. Some immigrants will come from Europe and North America, and some from Polynesia, although there are various limits on how many we can draw off from there. Indeed we may want to consider a greater draw-off of migrants from Melanesia and Micronesia to ease the pressures on Polynesia.

<>Some will come from Asia. Whether the official projections have the proportions right is a matter which only time will tell.

<>We can influence these outcomes to some extent through migration policy. Globalisation and the Wealth of Nations argues that migration is one of the policy areas in which nation-states will retain considerable influence. But it goes on to argue that the world’s migration projections are timid, and that for various reasons – getting a balance when the population ages is the factor most explored in the book – migrations rates to rich countries will be higher than the official projections (although New Zealand’s may be an exception in its realism).

<>By international standards New Zealand has a high proportion of its peoples which are overseas born: 23 percent in 2006. We are a people of migration – even the Maori recall their migration of about 1000 years ago – and we are likely to remain so.

<>Asians will continue to migrate to New Zealand. One issue is at what rate. But more important how will we treat them when they are here. The guidance from civil nationalism is that they are to be welcomed, respected and celebrated for what they can contribute to New Zealand. Of course we should regulate the migration, but once the migrants cross the nation’s boundaries they should be treated with respect. Moreover we need to be careful in our responses to potential new visitors, that we do not undermine their ethnic communities already residing here.

<>An interesting phenomenon is the diaspora. Globalisation and the Wealth of Nations details the Australian one, but for this presentation’s purposes, the Samoan diaspora – which is also discussed in the book – is of greater interest. More than half of all Samoans live outside the Republic of Samoa and American Samoa. Many, but not a majority of them, live in New Zealand. While they are proudly New Zealand Samoans, even some of those born here (nowadays more than half) maintain some connection with their ancestral islands.

<>Now we probably take a benign or even celebratory view of Samoan New Zealanders who still have attachments to their ancestral lands. That is easy because Samoa presents no threat to New Zealand. But in the past we have been fearful of our Asians’ attachment to their ancestral lands, because their Asian countries are presented as a threat. A major issue here is our sheer ignorance of Asia in all its multi-facets – which is a matter which can be remedied by better education.

<>Which leads to the issue of the activity at government level. There is no doubt, reflecting the nation as a whole but a little ahead of it, that the government is committed to civic nationalism. But how to do so practically? For instance, should Creative New Zealand support writing in the Samoan language, which is the third to largest spoken language in New Zealand? And if you say ‘yes’, as I do, should it support writing in, say, Cantonese?

<>But as well as celebrating the diversity, there is also a need to support the commonalities which bind us. The core curriculum of the education system is an obvious answer, but an effort is needed to promote ongoing commonalities among adults. Let me say here no more than that this is a central role for the Arts, Culture and Heritage portfolio, but that sometimes the commonalties which may bind us come from surprising sources.

<>I do not think anyone was surprised by the shared grief of the nation at the death of Ed Hillary and the celebration of his attributes which we thought reflected being a New Zealander. But there was surprise at how the repatriation of an unknown warrior touched us all. Which reminds us that unlike countries driven by ethnic nationalism, the New Zealand government is not able to drive our images and means of national expression, only to support them. But the commonalities need to be there and need to be promoted.

<>Much of what I have said this evening may seem a long way from the issue of globalisation, although those who read Globalisation and the Wealth of Nations will recognise the issues on many pages, after allowing for others which set out the analytics of the economics of globalisation – which I have applied to New Zealand in other venues. They will see that these economic forces are undermining our ability to define a nation in terms of a limited set of economic policy instruments, and generate the need to define it in much wider terms using the economy where we can, conscious there are other powerful but complicated means of intervention – arts, cultural, heritage, media and recreation policies for instance. And they will see that there are enormous pressures for diversity within the nation – from international engagement and from migration. Donne said ‘no man is an island’. Nor is any nation.

<>Of course we may fail. It is possible we are doomed by New Zealand’s small size. A more likely source of failure would be not managing sensitively the tension between diversity and commonality. If we fail we could end up a state of Australia or of the United States of America, neither option of which I contemplate with pleasure or even with equanimity.

<>I would rather we took the challenge of nationbuilding with the same courage and competence as our forefathers and mothers did in the past, and so build a civic nation in a globalising world. If we fail, let us fail gloriously.

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Household Equivalents for Engel Curve to Estimation

This entry was posted in Distributional Economics, Statistics on 6th April 2008 by Brian Easton.

Note prepared 6 April, 2008.

Keywords: Distributional Economics; Statistics;

The conventional Engel Curve relates expenditure on (usually) food (F) to aggregate household (usually) expenditure (X). Since it is a one-to-one relation it my be mathematically inverted to

(1) X = f(F, z)
where z is a vector of other variables which are relevant.

Such a function can be used to estimate a poverty line. If we know the F for a household on the poverty line then we can estimate X their total expenditure using equation (1).

A particular functional form widely used is

(2) log(X) = α + βlog(F) + Gzi
where the zi are a set of other effcts, such as the location or ethnicity of a household.

It is a standard assumption – indeed an apparently universal empirical finding – that β > 1, that is total expenditure rises faster than food expenditure. (Note that because we have inverted the equation, the expenditure elasticity is 1/β and the empirical finding is usually 1/β< 1.)

Normally we assume in the presentation that the households are of similar composition (say two adults and two children). However typically the data set consists of observations from households with many different compositions (including 1, 2, 3 and many adults and various numbers of children of various ages).

A simple way of dealing with this is to calculate X and F on a per capita basis. Hover this does not allow for:
(a) Children’s needs differ from adult’s;
(b) There are economies of scale so that a couple may be able to live cheaper than two adults living separately (for the same standard of living) .

Both effects will differ for different expenditure groups. For instance, there are likely to stronger economies of scale for housing, than there is for most other items.

A means of allowing for these effects is ‘household expenditure scales’, the simplest of which is the per capita one. Basically it scales each expenditure to the same equivalent (say, of a single adult). Note that the import of the previous paragraph is that there should be different scales for different expenditure groups.
Mathematically the household equivalence scale is a function of the various elements that make up the household composition. We represent the functions by xe for all expenditure and fe for food expenditure. The arguments in the function will become evident below.

The introduction of the household expenditure scale is to modify equation 2 to

(3) log(X/xe) = α + βlog(F/fe) + Gzi

which following a little manipulation gives

(4) log(X) = α + βlog(F) + (log(xe) – βlog(fe)) + Gzi

In effect this adds an additional term – log(xe) – βlog(fe), which we shall call ‘d’ – to equation 2.

The next step is how to estimate the term. One procedure is to set out a functional form but typically that involves a non-linear estimation. Moreover, we cannot be sure what the form is.

An alternative is to use dummies as follows. This is a simple example:

set d10 = 1 if there is only one adult in the household, = 0 otherwise
set d20 = 1 if there is only two adults in the household, = 0 otherwise
and more generally

set dm0 = 1 if there is only m adults in the household, = 0 otherwise

set d11 = 1 if there is only one adult and on child in the household, = 0 otherwise
and more generally

set dmn = 1 if there is only m adults and n children in the household, = 0 otherwise

One could use a more complicated system. For instance the dummies could be extended to include children by age categories.

Now using the data base estimate the equation

(5) log(X) = βlog(F) + Gzi + G(δnm)(dnm)

where the second summation is across all n and m.
(What has happened to the α? Since Gdnm = 1, then the model would be under-identified if it and all the dnm were included.)

The δnm are the equivalence scale values for each n,m household composition.

Equation 5 is a relatively straight forward exercise to estimate (it is linear in the unknown parameters) providing the data base is reasonably clean, and the zi are known.

There is one disappointment with this method. It is not possible to estimate either log(xe) or log(fe) from the δnm, because the relevant equation will be under-identified. One needs to make some external assumption (such as log(xe) = log(fe) ). That limits one’s ability to assess whether the δnm are sensible.

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A Good Keynes Man

This entry was posted in Listener, Macroeconomics & Money on 5th April 2008 by Brian Easton.

<>Alan Bollard’s not a Grinch, he’s just doing his job.

<>Listener: 5 April, 2008.

<>Keywords: Macroeconomics & Money;

<>Last October, Alan Bollard, Governor of the Reserve Bank, broke an implicit constitutional convention when he said that if this year’s tax cuts were too generous, he would have to tighten monetary policy. Governors have long muttered in private about irresponsible fiscal stances (to do with the balance between taxation, public spending and government borrowing), but reservations weren’t aired publicly. You can find the odd remark during the Don Brash years, but the threat was never so explicit.

<>Bollard has clearly stated that too permissive a fiscal stance would mean higher interest rates. Before him is the example of his Australian equivalent, Glen Stevens, who raised interest rates just before last year’s election, because he judged the Australian Government’s fiscal position was too expansive. Bollard would not do that lightly, but like his transtasman equivalent, he might have no choice.

<>The public rhetoric misrepresents Bollard. It is easy for lazy journalists to present him as the Grinch who stole Christmas; in fact, he has statutory and contractual obligations requiring the Reserve Bank to restrict the economy when inflation is increasing, by maintaining and increasing high interest rates. Those who complained about the Grinch months ago are now complaining about inflationary pressures.

<>Almost certainly, Bollard is not opposed to tax cuts per se. His concern is that they inject extra demand pressure into the economy – which, above a certain level, can be inflationary. If tax cuts are accompanied by lower public expenditure – which reduces demand pressures – there might be no need for additional monetary restraint. The Reserve Bank’s concern is the degree to which the Government budget is stimulating the economy, measured by the overall fiscal deficit.

<>While the breaking of the constitutional convention is to be welcomed !– although one hopes it is necessary only rarely !– the underlying economics analysis has also shifted. It was commonly accepted 40 and more years ago that fiscal and monetary policy could not be set independently. That insight got lost in the late 1980s when Rogernomics dictated that the Reserve Bank should run monetary policy independently of fiscal policy (and the Rogernomes ran some of the most permissive fiscal stances of the post-war period). In the mid-1990s, the Reserve Bank and Treasury hardly talked, but when Bollard became Secretary of the Treasury relations began to thaw.

<>Our monetary policy is not out of line with conventional wisdom. US Federal Reserve chairman Ben Bernanke recently said of the interaction between fiscal and monetary policy that the Fed couldn’t regulate the economy by itself, but needed co-ordinated fiscal assistance.

<>This return to Keynesianism is becoming increasingly necessary, given the challenges the world economy faces. The monetarism that so influenced the Rogernomes is a very simplistic theory (even some journalists can understand it). But it is not particularly useful during periods of economic and financial turmoil. That doesn’t stop monetarists from obsessively repeating their ideology, but the cold reality is that it is their nostrums that created the current mess.

<>The Minister of Finance, Michael Cullen, is a Keynesian who flagged when he took office that, if necessary, he would run a financial deficit. Fortunately it was not appropriate to do so in the first eight years of his tenure, but it may be necessary this year. Cullen has announced a set of criteria that, if met, would enable him to cut income taxes. Bollard is probably comfortable with the criteria, but will scrutinise their application closely.

<>An even bigger worry is that the Opposition will overbid with even more extravagant tax cuts, as it did in 2005. It would be constitutionally very innovative if the Governor of the Reserve Bank were to comment on the Opposition’s policies. Let’s hope he won’t need to.

Incentives Matter: Incentive Design Matters More

This entry was posted in Listener, Social Policy, Statistics on 22nd March 2008 by Brian Easton.

Listener: 22 March, 2008.

<>Keywords: Social Policy; Statistics;

<>“Incentives matter” is a routine part of economists’ thinking. Tax a commodity, its price goes up and there is an incentive to reduce consumption. Reduce the tax, the price goes down and the incentive goes the other way.

<>But many real-life circumstances are more complex, and the right incentives are more difficult to work out. Consider long-term welfare recipients. Some are going to remain there till death, but others would be better off if they had jobs, were earning their own livings and were better integrated into society. (Taxpayers would be better off, too.)

<>There have been various attempts to design incentives that help beneficiaries to rejoin the workforce. Typically, someone has a good idea, it is implemented and then we have no follow-up as to whether it works or not. The Canadians have been more systematic. They randomly divided a group of welfare recipients into two. One group was left on the current regime, the other was put on a self-sufficiency project (SSP) that gave its participants generous incentives to leave welfare and get full-time work.

<>Getting a job is not easy. It needs time and a rearrangement of one’s life. The SSP group was given a year to get a job, and the scheme then gave the members a full-time earnings subsidy for the next three years.

<>Given the 5600 participants, each with their own special circumstances, this experiment was difficult to evaluate. It was investigated by Canadian David Card, based at the University of Berkeley, and New Zealander Dean Hyslop who works in our Treasury. Their paper, published in the prestigious journal Econometrica, has been given the even more prestigious Ragnar Frisch prize, which is awarded every two years for the best applied econometrics article published in the past five years’ issues. (Frisch was one of the two first Nobel Laureates in economics.)

<>The study’s findings about the long-term effects of the SSP are salutary. In summary, they are zilch. The scheme gave some beneficiaries the incentive to get a job earlier than if there had been none. But after it came to an end, their participation in the labour force was much the same as those who had been ineligible. More of both groups were employed than when the scheme started (not everyone, of course), but those without the incentive merely took longer to get a job. The substantial public spending on the incentives to get people off the scheme did so in the short run, but gave no long-term return.

<>Even more disappointing, the programme seems to have done nothing for the wages paid to the subsidised. I have had the view that on-the-job workers acquire experiences and skills that should lead them to progress up through the workforce. Getting a beneficiary into a job should trigger this improvement. Because they got their jobs earlier, this theory predicts, the subsidised should have been better paid than the unsubsidised in the long run.

<>Card and Hyslop were unable to find any such effect. Instead, they found the additional employment by the SSP group was largely at or near the minimum wage, and there was no significant wage growth over time.

<>Formally, the study concludes the short-term incentives had an effect, but only in the short term. There were no long-term gains. The public spending was a subsidy, but it was not an investment in getting beneficiaries into good-quality jobs in the long run.

<>This does not mean we should give up trying to get suitable long-term beneficiaries back in the workforce earlier. But it seems likely that incentive schemes such as the SSP give a short-term boost but are not particularly effective in giving a long-term one. My hunch is that we probably need to look more at upgrading the beneficiaries’ skills and, in the case of parents, providing appropriate childcare facilities.

<>So, “yes”, incentives matter. That’s the easy part. Designing incentives matters more. That’s the hard part.

<>D Card & DR Hyslop “Estimating the Effects of a Time-limited Earnings Subsidy for Welfare-leavers”, Econometrica, Vol 73, No 6 (November 2005) 1723-1770.

Buzz Words V Business

This entry was posted in Governance, Health, Listener on 8th March 2008 by Brian Easton.

A report finds our health system is too top-down.

Listener: 8 March, 2008.

Keywords: Governance; Health;

“There does not seem to be the understanding that several actions – for example, writing a policy or reminding staff about a concern – are actually very weak actions. There is also little indication that general clinical staff are involved in the improvements.”

Dr Mary Seddon’s recent report for the Health and Disability Commissioner is indicative of an approach throughout our health and tertiary education institutions. Generic managers may make policy decisions – in this case about safety practices – but unless the specialist professional staff (in this case clinicians) are involved, the decisions will not be effective.

The ineffectiveness seems to have intensified in the past 20 years following the public-sector reforms of the late 1980s. They strengthened the administration relative to those who actually deliver services to the public, making the organisations top-down rather than bottom-up.

The additional generic managers knew little about the issues faced by deliverers, and often seem insensitive to the deliverers’ concerns. Perhaps it is because their theory – insofar as there is one – consists of fashionable slogans and buzz-words rather than rigorous thinking.

The top-down approach arose because the reformers were deeply suspicious of professionals, assuming they acted only in their own self-interest. (With the exception of the reformers themselves, they thought everyone did.)

As a result, there can often be bitter antagonism between professionals and managers. Seddon cited only three district health boards – Canterbury, Waikato and West Coast – as having “patient-centred” approaches. Given that clinicians are usually patient-centred, the implication is that most of the remaining 18 DHBs have administrations that are not.

The disjunction is not peculiar to hospitals. Academics grumble about their administrations too. They may have the noble objectives of the liberal university, which Wilf Malcolm and Nicholas Tarling vigorously defend in their recent Crisis of Identity? The Mission and Management of Universities in New Zealand.

But too often they are bewildered about what their university actually believes. Its statute may say it has a role as a critic and conscience of society, but there is little evidence of pursuing such an objective. Instead, the purpose of teaching and research seems to be to fund the registry.

Talks to staff by vice-chancellors, if they still occur, do not get across the problems their universities face. Most academics seem to have no idea about what is going on and assume that registries do not either, except in terms of narrow financial objectives. It’s as if the finest minds in this country are incapable of analysing themselves, while the finest teachers cannot transmit their understandings.

The financial incentives that fund our universities do not align with the sort of principles that Malcolm (a former vice-chancellor) and Tarling (a former deputy-VC) espouse. Since there is no funding, universities do not promote public intellectual activity, even in cheap ways like awarding it honorary doctorates.

Whether DHBs face a similar problem of alignment is unclear. What is evident, though, is that many hospitals’ administrations do not seem to appreciate the most elementary rule of pastoral farming: to ensure high productivity, keep your livestock happy.

You see this in the circumstances at the Capital & Coast DHB where an incident precipitated Seddon’s report. (Although for all the cases I know about, the patients have nothing but praise for Wellington Hospital’s clinicians.) Staff are shortly to move into a new hospital building. During its design, many of the clinicians felt they were not listened to.

As a result, they don’t “own” the new arrangements. As things go wrong – which is inevitable in the start-up of any new facility – they will become increasingly grumpy. Hopefully that won’t affect the treatment of their patients, but it will further increase the distance between administration and clinicians.

The grumpiness will not be resolved by a top-down administration producing, without the wholehearted involvement of it clinicians, yet another report, nor by it announcing it is “building a culture of success”.

<>One DHB told Seddon its buzz-words were “all well implemented and a part of how we do things”.

Assessing the Social Impact Of the Ets

This entry was posted in Environment & Resources on 28th February 2008 by Brian Easton.

Paper to MSD seminar of the Social Impacts of the Emissions Trading Scheme, Thursday 28 February, 2008.

<>Keywords: Environment & Resources;

<>Thankyou for the invitation to talk today. It is a pleasure to be working again with Computable General Equilibrium Models. In the early 1980s New Zealand was a world leader in CGE modelling. Unfortunately when they were applied to the policies of the late 1980s, they did not give the answers that the policymakers wanted. It turned out that the CGE predictions were far more accurate than the promises of those who implemented the reforms, so CGE modelling made two unforgivable mistakes: it criticised the policy makers and it got it right. Accordingly CGE Models were punished by having investment in them cut back. So nowadays we have to scramble around with underdeveloped tools when they are needed.

<>That they are needed is evident if you look at this diagram, which pops up in various official papers. On the vertical axis is the outlay of houses on home heating as a proportion of total outlay; on the horizontal axis is household incomes.

<>The graph seems to be correct but it is misleading, insofar as it implies that the poor are relatively big energy uses. They are not, of course. We are not going to solve the world’s energy problems by blaming the poor and becoming rich. The mistake arises because the graph shows only direct energy consumption, and not direct and indirect – exactly the sort of issue which CGE models are designed to clarify. Until there is evidence to the contrary, we have to assume the commonsense position, that the higher the incomes the higher total (direct and indirect) energy use, that the income elasticity for energy is above unity.

<>Of course a CGE model requires some challenges of interpretation. Here I confine myself to making a few salient points on Adolf Stroombergen’s various applications to the Emission Trading Scheme (ETS).

<>Contextual Assumptions

<>The first is that it is worth reflecting on ‘the business as usual’ scenario which underpins the comparison. It involves variety of assumptions including about:

<> The current international financial crash, which may be the greatest since the 1930s depression;

<> Peak oil, or at least the rising price of oil;

<> The impact of the internet on the location of jobs and services;

<> The relative balance between food and manufacturing prices (the terms of trade);

<> The international trading environment including the Doha round and its successors, and the rising numbers of increasingly complex Free Trade Agreements;

<> The rising economic importance of East and South Asia;

<> Major new technologies in biotechnology, ICT and new materials;

<> Other major changes in government policy.

<>Now Adolf, whose modelling we are looking at today, will say – quite correctly – that with the exception of new technologies affecting carbon emissions, these assumptions do not invalidate the model conclusions, because they impact much the same on both the ‘business as usual’ and ETS imposed scenarios.

<>However, it is worth listing these assumptions because any one of them may have as great an impact as the ETS. Thus while there are specific issues associated with carbon emissions, the policies about social impact need to address all the possibilities of structural shock.

<>There is one further assumption in the business as usual scenario I need to point out. It ignores the fact that the rest of the world is also taking measures to slow down the rate of global warming. Much of the public debate surrounding Adolf’s forecasts has not understood this, nor the policy issue of what is the appropriate international strategy for New Zealand if the rest of the world takes global warming seriously.

<>If the rest of the world takes measures to inhibit carbon emissions, that may be of immediate economic benefit to New Zealand, as well as the long term and climate gains. Thus the modelling describes the downside to New Zealand of our dealing with carbon emissions, but it does not investigate whether there is an upside from the responses of the rest of the world.

<>The Impact of the ETS

<>How big is that impact of the ETS? According to Scenario 10 of Adolf’s modelling runs, under some assumptions which I shall deal with shortly, there would be a loss of about 52,000 jobs (or 2.6% of workforce). Strictly the model says they will be lost over the 19 years from 2006 to 2025, say about 2800 jobs a year, which is not a major challenge. However Adolf suggests that because the ETS regime is introduced over a short period, the job displacement will be relatively quick. I consider that a reasonable interpretation of the model.

<>Do the 52,000 jobs represent a big loss? Well of course they do, but in less than five years beginning in October 1988, 754,000 New Zealanders enrolled with the New Zealand Employment Service. Additionally, there were others who chose not to use the NZES. By comparison, 52,000, which includes everyone who has to look for a job, is much less – less than 7% of that total. So we are not talking about a structural change as great as occurred in the late 1980s and early 1990s.

<>Moreover, there is a sense that the 52,000 is an overestimate, although there are all sorts of caveats. The model scenario does not included the likely technological changes which the ETS will induce – but we have to make sure they happen – while the model assumes there is no flexibility in the prices system. You can see this in the way various sectors respond to the assumed ETS in Scenario 10:

<>Employment: The vast majority of sectors cluster around the average job loss of 2.6%. For instance, four fifths of the lost jobs are in sectors which are in the range from 1.6% to 3.6%. The main exceptions are farming and energy industries which experience high reductions, and the public sector with lower losses.

<>Regions The regions are even more clustered. With the exception of Waimate (Hurunui and Southland are on the upper edge), they are all in a 2.1% to 3.6% range. The pain is spread nationally. (However, the detail is not fine enough to allow for a factory closing down in a particular region.)

<>Occupations The biggest impact is on job losses for production workers, with the semi-skilled more affected than the skilled or unskilled, although there are particularities of experiences for each occupation (so that energy and farm workers are affected more). Production workers amount to 30 percent of the total labour force and lose 39 percent of the jobs.

<>What is happening in Scenario 10 is basically an economic contraction with some of the major carbon emitters – farming and energy – contracting at a higher rate.

<>But Scenario 10 assumes that factor prices are fixed, so that wage rates, among other things, don’t change.

<>An Alternative Response Assumption

<>This is a fixed-price assumption. Suppose we allow wages (and some other factor prices) to vary, responding to market conditions. That is the Scenario 5 assumptions. Their effect is that there is no change in total employment. The sectoral compositions are as follows:

<>Employment: The vast majority of sectors now cluster around the average of 0.0%, so there is little change. Again the main exceptions are farming and energy industries which experience reductions of over 1 percent, but the totality of jobs lost among them is around 2500.

<>Regions As before the regions are even more clustered. No region suffers more than a .4% drop in employment.

<>Occupations There is no tabulation of occupational outcomes under Scenario 5.

<>What I have done here is compare the rigidity of Scenario 10 to the flexibility of Scenario 5. In summary, if factor prices are flexible, then there is not a lot of change in the structure of industry or employment or regions except where we might expect it. Unlike the fix-price model which is primarily predicts a contraction, the flex-price model sees the issue is more of reallocation and price adjustment.

<>Conclusions

<>CGE experts like Adolf can go on making their models jump through various hoops. My time is short, so as much as I would like to as well, I had better bring together what we learned. I begin with that I am cautious about the precise quantities these models predict. Their strength is they provide analytic insights.

<>Second, I repeat the two weaknesses of the modelling. One was that it does not look at what the rest of the world does. It is not impossible that if the rest of the world takes its Kyoto obligations as seriously as New Zealand we may be better off than the predictions. The other weakness is that it does not incorporate technological change induced by the policy changes. It could. I am sure Adolf would love to run such a simulation. It should make possible a measure of the gains from investing in low carbon emission livestock technologies.

<>Third, having cleared the preliminaries aside, I can say something about the social impact of an ETS.

<>A particular concern is the distributional impacts, but we have only very limited insight into the effect of the ETS. Some of the hardest hit would appear to be in lower paid occupations, but it seems likely that since higher incomes are likely to consume relatively more energy in total, the combination of pay and prices cannot be inferred. (In any case, there are implicit income tax changes in the simulations.)

<>Insofar as I have a conclusion it is limited, but policy-useful. The more flexible the economy, the better it is able to cope with a shock such as the ETS. That conclusion applies for all the other shocks I listed at the beginning. Even were there no ETS the economic policy conclusion would be to go for flexibility.

<>But that leads to what is the main conclusion from this survey. A flexible economy impacts upon society. People prefer stability and they want some security. There is a tension between a flexible economic policy and the desired social policy. It is the same tension as we have faced over the last two decades.

<>But we don’t know nearly as much about the complexities of societies as we do of economies. In principle CGE modelling has the capacity to monitor some of the social impacts of economic change – on the household income distribution, on the government’s fiscal position, on occupations, on the intricacies of the labour market. But in New Zealand we do not have the practical capacity.

<>That is the consequence of the cutback of investment in CGE models from the mid-1980s – dropping us from the top half of the OECD into to the bottom half. If we are serious about monitoring the impact of economic change on society – if we really care – we are going to have to recommence that investment program.

<>Go to top

What Can We Learn from the Government?

This entry was posted in Governance, Maori on 23rd February 2008 by Brian Easton.

Speech to the Tribal Economies Forum of the First Nations Futures Program, Christchurch: 23 February 2008 (Revised)

Keywords: Governance; Maori;

Tena kotou, katoa.

Thankyou for the invitation to speak to you on tribal economies. It would not, however, be appropriate for me to tell this audience how to run their tribes. What I thought is I could usefully do is to help you think about the issues which you face by describing the development of thinking about the running the New Zealand government.

My introduction to the topic began when I was in England in the 1960s, and one of my students wrote a thesis on the governance of British Rail. Up till then, at about six to eight month intervals, the British government had given the railways a direction on what might be expected of it. Each time it was different. One occasions it might be they wanted it to make a surplus to pay to the government accounts; a little later it might decide they were to invest to improve the national transport infrastructure; but then British Rail would be directed to restrain prices as a contribution to inflation; followed by to take on labour to reduce unemployment; and then there would be a direction to assist regional development in failing areas; not to mention to upskill the labour force; then to cut back railway lines to run a more efficient operation; by around which time the entire cycle would repeat itself.

Of course the conflicting directions arrived so quickly one after another, that they were never fully implemented. Indeed, nothing got implemented properly at all. More fundamentally, those running the company could never be held to account – since they could always draw attention to one of the list of objectives that it seemed to be fulfilling – and so they ran the nation’s rail service for their own purposes and not in the social interest.

I don’t know of any similar study for a New Zealand State Owned Enterprise, although they too were subject, especially in the 1970s, to conflicting directions.

This led to a major review of the role of SOEs in the 1980s, and an entirely new framework. Basically each was required to behave as if it was a private business, including paying taxes in the same manner. The government gave each business considerable operating independence. It put them into the legal structure of corporation, whose shareholders – the government – appointed the board, who had mainly business experiences, and told it to run the company with the purpose of making a profit, the dividends from which were to be remitted to the exchequer.

This sounds relatively straight forward, although there are some economic subtleties. In particular, while the profits contribute to the government accounts, there was an economic theory which said that businesses using resources – which includes labour – to make the best long run profit they can, contributes to the nation’s economic welfare by providing the goods and services it wants as efficiently as possible.

Actually the theory only applies under certain circumstances. Mostly, the actual circumstances are near enough to the theory for some sort of outputs – such as education, health and the media – the theory does not apply at all well. And it does not apply where the business is a monopoly. I shall talk about the first group shortly, but because the reservations about monopolies don’t generally apply to tribal businesses, I wont discuss them further.

Even for those businesses which fit the model there are some complications.

First, there may be side-constraints imposed on them. For instance, SOEs are required by law to be good employers, and they are expected to act ethically. These are, of course, not requirements of private businesses, although many would argue it was in their best interests to do so.

Second, most large private businesses make donations from their surplus to worthy causes. While this may be thought of as ethical, it happens that the grants are usually targeted to increase the public profile of the business and to improve employee morale. There are various rules about just how much and to whom a corporation can donate, and SOEs stick to them scrupulously.

Third, sometimes the government may want SOE to do something which reduces the SOE’s profitability. In such cases it pays the SOE to carry out the task rather than directing it to carry out the required end. An example was a subsidy paid to keep the Canterbury-West Coast railway line open. Of course the government can do exactly the same to a private business if it wants.

Why does it not give a direction to its SOEs and take a lower profit? It could. But this way the action is transparent. Parliament knows that its SOEs are maximizing profits – that is what parliament legally requires of them. But the subsidy is an item in the statements of public expenditure, so parliament can debate and scrutinise the propriety of that subsidy.

The dividends from its various SOEs go into the general funds which parliament spends. If a particular area – say education – is decided to be a priority then perhaps more of the funds go into that area. However, there is no generally earmarking of funding sources and disposal so one cannot tell whether the surge in spending in a particular area is the result of increased dividends from the SOEs.

I have already mentioned that there are production units whose situation is such that the assumptions of maximising profits in a competitive environment, do not apply. They include hospital, social service delivery, universities, schools, the media, the conservation estate, research establishments and of course the core public service itself. I’m afraid there is no simple coherent theory to tell how to manage these entities. Usually because there is no simple summary of their output performance.

The government requires that they use resources as efficiently as possible, and that they make a surplus which contributes to their reinvestment needs. After this the framework gets murky. Sometimes they are set up as business entities sometimes they are not. Sometimes the government requires them to run as if they are businesses – as it did with hospitals and research institutions in the 1990s; sometimes it does not – the current government reversed the requirement in some cases when it came into power in 1999. Basically it is all a muddle, mainly because once the purity of the business in a competitive environment is disturbed, there are no simple rules of governance.

Tribes need to be aware of this. They will have commercial investments but they may also run hospitals, schools and other service delivery entities. It seems to me that the best hope one has of doing this well is to understand the rigorous theory of businesses in competitive markets, and temper it with an understanding of the differences of public service entities together with commonsense.

Local authorities appear to have a variation on this governance structure from the central government. Typically each sets up a separate committee or board to manage all the council’s commercial investments including those for which there may only be partial ownership. The committee typically consists of elected representatives together with people with business and investment skills. The aim is to consolidate the business experience available to the council to manage its commercial investment, while maintaining some independence from the council proper and yet being accountable to it. The equivalent task in central government is managed by the Treasury which has a division called CCMAU – the Crown Company Management Advisory Unit – which has its own minister of State Owned Enterprises.

Where the government is primarily a commercial investor, and not an owner of the asset, as in the case of the New Zealand Superannuation Fund, it also appoints an investment board, gives them some guidelines – typically about ethical investment, the time horizon and the degree of risk – and lets them get on with the job.

If the government were ever to interfere in a manner which a board thought was inappropriate, it would have to do so transparently – hard copy – and would run the risk that the board (all or in part) would resign expressing their view of the inappropriateness of the central involvement.

Occasionally there have been kafuffles, but not often, given the number of boards there are and that the policy has been running now for almost two decades.

While this broad system I have just described is widespread and widely admired, it is not universally accepted. There are two common complaints. One is that is that the control of the publicly owned assets is not democratic; the other is that the SOEs sometimes take actions which are against the social interest. I cannot fully disentangle the two criticisms, but I’ll try.

First, the arrangement is democratic in the sense that the system has been implemented by parliament (or a council) via a democratic process. In the course of doing so, the deliberative body has decided not to avail itself of some of the interventions that are in principle available to it, Parliament does this more than you might think. For instance it has the power to behead anyone who criticises the government. But it choses not to use this power because it does not think it is in the best interests of the nation.

There is another sense in which the arrangement is democratic. It is transparent. That is, both parliament and the public at large can see what is going on, while those that make the decisions are accountable to parliament and ultimately to the electorate.

Why people argue the system is not democratic is, I think, that it does not always do what they want or what they think the public want. That is their second complaint: that the SOEs do not act in the social interest.

But do businesses – not just SOEs – act against the social interest? I skip over here a discussion on what is the social interest, or even whether there is an agreed social interest, instead assuming that there is a well established one.

In order to understand the debate, it is necessary to rehearse some history of ideas. The nineteenth century saw the evolution of great corporations which were both awe inspiring in terms of what they could produce and how efficiently they did it, but troubling in that they sometimes wrought destruction of the social fabric in their societies.

Among the proposed solutions to this tension was cooperative ownership either by the workers or suppliers or consumers. On the whole this is not relevant to tribal business. An alternative or complementary strategy was the public ownership of business.

Because it reflects what we knew then rather than what we understand today, the public ownership of industry is a very nineteenth century solution, even if there are many people who believe to this day that social ownership is the only way to control large firms. Few of them acknowledge, however, that public ownership can be a very ineffective way of running a business – as we saw with British Rail. Nationalising it is the easy bit: how to run it once it is nationalised is a much more difficult.

In the debate about national versus private ownership, it is often overlooked that ownership is only one means to an end. What we really want is the social control of industry: that businesses do what society wants of them in the pursuit of its social goals.

What economists discovered, as I have already explained, is that under certain conditions businesses in competitive markets contribute to a the social goals of a liberal society. The corporatisation reforms of the 1980s were the implementation of this approach, although sadly the extremists forgot the caveats of those certain conditions and applied the principles in circumstances where market conditions did not justify treating the entity as simply a business in a competitive environment. Moreover often the privatisation they enacted was unnecessary and inept.

The analysis never said that what is good for business is good for society, as the extremists were wont to argue.. Those particular conditions, and the market competition, have to exist. Moreover, the analysis does not mean that businesses never harm some people sometimes. They do. Price rises hits pockets, especially of the poor; seeking efficiency leads to layoffs of workers.

At issue is what other measures we might take if such things happen. Do we adjust the incomes of the poor as prices rise? Do we offer effective redeployment schemes when workers are laid off? Perhaps what the critics of the current SOE regime should be saying is that we dont always have adequate protection schemes for the affected. To go on to argue that the businesses should not take actions which are damaging, leads down the track that derailed British Rail.

Perhaps I have been a bit indulgent in elaborating this issue, because typically a tribe is not so big in the economy that it has to worry about its impact on the nation’s economic performance. (Sometimes it may be so big in a locality, though, that these issues crop up – what if it owns the major employer in a town?) The point of my indulgence is to emphasise that prudent investment in appropriate businesses benefits both the investor and society as a whole. But by itself that is not enough.

What might a tribal authority learn from all this in regard to its commercial activities?

First, transparency is a part of democracy. Maoridom has moved a long way from the direct democracy of pre-European times in which their communities lived in small intimate units which debated vigorously on the marae and made decisions based on consensus. Today’s tribes are too big, and people’s interests too complex and diversified to do that any longer, even if one could replicate the marae debate.

But second, process is also a part of democracy and economic efficiency. Managers have to be given the space to carry out the complex tasks asked to them without excessive interference by the democratic process.

That suggests that there is merit in the local body arrangement of a separate investment committee which is responsible for the management and oversight of all the tribe’s commercial investments but which reports to the highest board of the tribe.

Sometimes the committee will be a passive investor, simply holding (and shuffling) its portfolio of investments in order to make a return; sometimes it will hold land in the portfolio which it leases out; and sometimes it will be an active investor in that it will need to make decisions about who should be appointed to the company and what should be expected of them.

There are a series of financial decisions to be made here, like how much should be borrowed to fund the investments, questions of responses to takeovers, how much will be remitted in dividends and so on. The upshot is that in most years the investment committee will remit an dividend to the supreme board, which will use it for pursuing the tribe’s wider purposes.

All this is but normal business practice, except that the tribal committee’s actions will be much more transparent than occurs for most private businesses.

Not all the entities are likely to be covered by this committee if the tribe is also running hospitals and schools and social service delivery. Another board to supervise them would be appropriate, but this time with experienced public sector managers rather than business people. (one or two of the latter may be appropriate and certainly at least two of the board members should be able to read accounts.)

I want to turn to the difficult question of whether any of these entities should give preference to people from the tribe that owns them. This is an example of what is generally called ‘nepotism’. You can tell from the origins of the word that it is a universal issue and one can easily cite many Western examples of the practice. Most would suggest that while it was beneficial to those involved, it has not been necessarily beneficial to society as a whole, nor frequently to those who own the entity.

Maori have a term ‘whanautanga’. It is for them to explain the term and describe the extent to which it differs from nepotism. The only thing I would say here is that as iwi size increases, the meaning of whanautanga may change.

In regard to employing relatives, my general advice is there is never any substitute for competence – no substitute for the best. However, I acknowledge the principle that was popular in the enlightened part of the public service some forty years ago that where there was two candidates of equal ability for a job they chose the woman, because they knew that getting there was much tougher for the women so she actually was the better candidate. That may be true for members of your tribe.

I would particularly caution against nepotism where the funding is from government for, say, social service delivery. Because it is particularly difficult to define the desired outcomes of such contracts, funders will look at the inputs and production relations. While sometimes it may be that the best person for the job is a relative, nepotism sets up a prima facie case that the internal arrangements are not efficient, and the funder is not getting sufficient of the agreed outcome. The reputation of much excellent Maori social service delivery was damaged by a few poor deliverers who recruited their families and failed to deliver.

The one area where a tribe might want to give preferential recruitment is in a strategy to upskill its people. It is likely to spend a significant part of its surplus available for pursuit of the tribe’s wider objectives, on encouraging its young to upgrade their educational and vocational skills. Why not then use a tribal business to do so too?

My answer is not so much to ask why not, but to ask how? To give a practical example, a couple of decades ago a number of iwi bought government hotels with the intention of taking on their mokopuna at the lowest levels and then, as they learned the ropes, they would take over from the existing staff thus upskilling the Maori labour force with on-the-job training. I dont know how successful the strategy was – I hope it included a component of formal training too. But in principle it seems a sensible strategy for an iwi to use its ownership of physical capital to leverage human capital. That happens in lots of Pakeha life too.

But what is the best way to do it? Particularities – including no doubt tax law – will be important so I want to just make two general points which summarise the theme of this paper.

First, any direction to an enterprise to do this, or indeed to do any other task, should be explicit, stable and transparent. If they belong to a democratic institution, the members tribe deserves to know what is being done on their behalf.

Second, the direction should give those implementing the task the responsibility to manage it. Certainly they should be held to account for their performance, but there should not be micro-direction from above.

These, of course, are the basic principles which underpinned the moderate elements of the reform in the governance of the New Zealand government which were introduced in the 1980s. It seems likely that their application will serve tribe’s people as well as they have served the people of New Zealand.

Kia ora.

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Civilised Drinking

This entry was posted in Health, Listener, Regulation & Taxation on 23rd February 2008 by Brian Easton.

<>Cheers to George Laking: 1912-2008.

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Listener: 23 February, 2008.

<>Keywords: Health; Regulation & Taxation;

<>Sir George Laking rendered many services to New Zealanders. Perhaps none was as important as his chairing the 1989 government committee that recommended today’s liquor licensing regime.

<>The consumption of liquor has always been a problem, less so in the distant past when spirits were weaker. Sugar plantations in the West Indies led to cheap strong spirits, and to Hogarth’s famous etching of “Gin Lane” with its wry “drunk a penny, dead drunk tuppence”.

<>The Maori did not have the sugar to make liquor. Early Europeans “quarried” resources – seals, whales, timber, gold, kauri gum – and moved on when the resources were exhausted. Their living was harsh, temporary and lubricated by liquor. Towards the end of the 19th century, refrigeration enabled permanent sustainable settlement. To eliminate the quarry mentality many supported prohibition.

<>Laking recalled being a six-year-old when his Methodist teetotal father campaigned in the referendum of 1919. The country actually voted for prohibition, but when the votes of overseas soldiers were added, the majority was reversed. Over the years the prohibition vote fell away, but a combination of wowsers and the liquor industry left us with a liquor supply system that was limited, crude and profitable. Older readers may remember the six o’clock swill, with the concrete floors of public bars covered with sawdust. Reform was slow, complicated and erratic.

<>We don’t know why the soldiers voted against prohibition, nor why Laking changed his mind from the family tradition. But I can’t help feeling that, like those soldiers, his overseas experience – he served in missions in Washington and London before becoming our second Secretary of Foreign Affairs – taught him there were more civilised ways to imbibe than standing up to one’s ankles in sawdust and “piss”.

<>
Whatever, he chaired the committee that recommended the sweeping away of the myriads of restrictions and exceptions, to be replaced by a simple regime where any responsible supplier could get a liquor licence. His principle was that the purpose of our liquor licensing should be to promote civilised drinking. As a result, small bars and restaurants flourish in even our smallest towns.

<>That switched pressure to other means of curbing the excesses: a tax regime that raises the price of cheap liquor, host responsibility, a vigorous enforcement of the drink-driving laws. Perhaps surprisingly, more liquor outlets have been accompanied by falling average alcohol consumption.

<>The biggest worries are rising consumption by teenagers and binge drinking in the 17 to 27 age range. Neither group has yet learnt to deal with their liquor: older generations set them bad examples.

<>We are trying to promote a more responsible attitude to safe drinking among adults (“It’s not the drinking; it’s how we’re drinking”), but behavioural change takes a long time. I would also favour more vigorous legislation for teenagers. Instead of mucking around with an ineffective statutory drinking age, we should make it an offence for anyone to supply a teenager with liquor that they use to get drunk. That would allow a responsible adult – say, a parent – to supervise moderate teenage drinking. Once the drinking became unsafe, the parent would be subject to this law.

<>Underlying this is the central problem of any policy change. It will make some people better off, and it will make some people worse off. Getting the balance right is never easy. Giving us all more civilised drinking may have made it easier for some to abuse liquor. But it is foolish to restrict all our pleasures because of the abuse of a few. (We could reduce road deaths by requiring someone carrying a red flag to walk in front of every car.)

<>George Laking knew about this fine balance from his 60 years of public service. After he retired from our foreign service he became our second Ombudsman, implementing the Official Information Act. Following that, he chaired the Legislation Review Committee, which improved legislation and on occasions cut back its excesses. And he chaired the Liquor Reform Committee. I think of him whenever I raise a glass. Cheers!

<> <>****************

From Listener 12 September, 1998.

THE MOST SUCCESSFUL REFORM? My choice of the most successful recent microeconomic reform is the 1989 Sale of Liquor Act, when a hundred years of clumsy complicated liquor licensing was largely swept aside to be replaced by the primary concern of regulation was health effects. The result has been a competitive flourishing of drinking establishments, especially in big cities consumers have civilized choice. But liquor consumption did not rise. It was falling before the reforms, and the downward trend has continued. There is anecdotal evidence for changed drinking habits which reduce alcohol misuse. Liquor licensing has a limited role in tackling alcohol misuse. Teenage binge drinking seems to have risen, perhaps as a result of TV liquor advertising. Legislative tidying up is still necessary. Why cant I buy liquor on a Sunday, yet drink liquor bought on weekdays? It seems like the South African prohibition against dancing on Sundays: married couples were advised not to have sex on the Sabbath, in case it led to dancing. The 1989 liquor reform benefited consumers, but it did not raise productivity. Sometimes the reforms give demand side improvements (better for the consumer) without supply side ones (improved productivity). In the opposite way, supply side changes in the government sector seem to have diminished quality of service to consumers.

New World Order

This entry was posted in Globalisation & Trade, Listener, Macroeconomics & Money on 9th February 2008 by Brian Easton.

The days of having a dominant world currency are coming to an end.

Listener: 9 February, 2008.

Keywords: Globalisation & Trade; Macroeconomics & Money;

When a barrel of oil rose to $US100, it also cost E69, $NZ130 and at least 200 million Zimbabwean dollars (at the unofficial exchange rate). There was some agitation among Americans, because they were paying 4.4 times the price of four years ago. In euros and New Zealand dollars it increased only about 2.7 times. (Zimbabweans can’t get their hands on the stuff.)

Here the US dollar value is functioning as a unit of account. A second function of money is as a medium of exchange. Oil trades are usually in US dollars, but some will happen in euros; if you are credible enough you may even transact in New Zealand dollars. (Zimbabwean ones are an international no-no.)

It is not necessary for the seller of the oil to hold the proceeds in US dollars. Many will diversify their financial portfolio into euros, sterling and yen (but rarely into New Zealand dollars, and certainly not Zimbabwean ones). Here the money is acting in its third role of a store of value.

These are the three basic functions of money. Other non-economic functions can be added. Commentators gets misty-eyed over a “strong” dollar (or whatever). They either come from the finance sector or they uncritically repeat anything the finance sector tells them.

Financiers like strong currencies because they encourage transactions that generate profits. But the productive sector may suffer from the “strength” when it weakens export performance and the economy.

This is a prelude to discussing one of the great structural changes that the world’s financial system seems to be facing, as the money it uses changes. Pre-globalisation, “money” was mainly gold and silver. (The UK’s “sterling” refers to a silver standard of 1000 years ago.) When the globalisation era began 200 years ago, the UK dominated the world economy and its sterling was the international currency. By the end of World War II, with the UK no longer such an important economy, and the US the “hegemon” (the dominant economy), the US dollar took over. It remains the international unit of account, transaction currency and reserve currency. But for how much longer?

The arrival of the euro introduces a viable alternative to the US dollar as a medium of exchange in many parts of the world. For a store of value, any sensible investor will have investments denominated in both US dollars and euros. The least important role, the unit of account, may change much more slowly.

This would have happened anyway, but in recent years the change has accelerated. The US Government deficit has poured out dollars since 2002. The expansion means its exchange rate has gone down, so the weaker currency is less attractive to investors as a store of value.

Moreover, awash with the currency of international preference, the financial sector introduced practices that are now euphemistically described as “extreme”. It may be that the sub-prime housing finance debacle is only the tip of an even more disastrous iceberg. No one knows its magnitude, but though financial institutions throughout the world are involved, the impression is that the US ones have been more culpable, and are likely to come out of any restructuring in a weaker state.

This column has to be a bit tentative, for we are entering unexplored territory. The US dollar will not be replaced by the euro but instead increasingly there will be two major international currencies. The same goes for the hegemon. The dominance by the US economy will not be replaced by another. Rather, there are going to be four (China, Europe, Japan and the US) or possibly five (India) economies, which will compete with one another, but none of which will be large enough to dominate the world.

If the experience of the UK losing its dominance is any indication, it will be particularly hard for the US to think about its diminishing relative power. But 200 years of being used to having a hegemon in a globalised world makes it hard for everyone to think about the future multi-polar one. We can start by not making a fetish of measuring the price of oil in US dollars.

The Proposed Economic History Of New Zealand

This entry was posted in Political Economy & History on 8th February 2008 by Brian Easton.

This proposal to the Marsden Fund indicates the state of play in February 2008

Keywords: Political Economy & History;

The last attempt to write a comprehensive New Zealand economic history was Condliffe’s New Zealand in the Making (1930) and The Welfare in New Zealand (1959). There are various studies which cover particular periods, notably Hawke’s The Making of New Zealand (1985) for the century from the 1860s and my In Stormy Seas (1997), which is an economics book but provides some coverage of the 75 years after the First World War. As a consequence, general histories treat the economy as having little influence, ignoring some obvious and important impacts. (Limited exceptions are Belich (1996, 2001), McKinnon (1997) and Mein-Smith (2005).)

Of course there has been much work on various economic aspects in recent years, including the construction of data bases and monographs. So the time is ripe for a comprehensive study of up to 250,000 words developing the analysis in my Hocken lecture Towards a Political Economy of New Zealand (1994) with additional attention to the business cycle as well as to the long-term shifts in the political economy, drawing the research together, while integrating it with general history.

My initial approach was to write a pure economic history, much like the studies mentioned above. However, following an extensive reading of general histories in 2007, I realised that such an approach would rule out engaging with the growing non-economic historiography. For instance, while it would be possible to mention the Treaty of Waitangi in a handful of paragraphs (as Condliffe (1930) does), that would both be unsatisfactory in terms of public interest and miss some of the rich economic issues that surround it (of how the Maori engaged with the commercial economy). The challenge is to write an accessible history of New Zealand for scholars, students and the general public from a rigorous economic perspective.

It is a four-year project. Funding has been arranged for the first two years (and the first two parts of the four-part book). This application is to the Marsden Fund to finance the last two parts.

A 2007 Claude McCarthy fellowship funded Part I. The Economy Before the Market consists of four chapters: The New Zealand Economy Before Man; The Polynesian Economy Before Commerce; The First Settlers; The Maori Before The Market. These chapters proved to be an enormous challenge since they involved disciplines other than those with which I am familiar – archaeology; anthropology; biology; ecology; geology – as well as having to adapt standard economic analysis for non-market economies. (Last year, 2007, also involved reading New Zealand history widely, and preparing for Part II.)

In 2008 a J.D. Stout Fellowship at the Stout Research Centre will enable me to write Part II, which is (currently) titled The Arrival of the Market. Planned chapters are The International Background; The Maori Joins the Market; The Quarry Economy; The First European Settlements; The First Depression; The Gold Economy; The War Economy; The Vogel Boom; The Long Depression; The Marginalisation of the Maori (few of the titles I am happy with).

Part III The Pastoral Economy is to run from 1882 to 1966 (roughly), including a chapter on the Maori migration to the cities. There are various hazy periods in the early twentieth century (from the end of the upswing after the Long Depression (1905?) to 1920), and there appears to have been a to-be-identified change in the role of urban centres in the interwar period.

Part IV, The New Economy, describes the response to the 1966 structural collapse of international pastoral prices , developing the thesis of In Stormy Sea, together with chapters on the New Maori Economy and the New Pasifika Migration.

Each Part will follow the structure of Part II: the early chapters being on the political economy followed by a roughly chronological sequence of the (longer) business cycles.

Not only will the study provide a detailed account of the economy through New Zealand’s history, but other innovative features include the interaction between environment and the economy and the role of the Pacific Islands in the New Zealand economy. In a very natural way (arising from the political economic frame) the study will pay more attention to the Maori economy than any past economic history.

I am also currently struggling with the first chapter of Part II. The conventional accounts of New Zealand economic history are Eurocentric. I am not sure where this will lead, but I hope that the next book will be as internationalist as my Globalisation and the Wealth of Nations (2007) and yet more indigenous than many past economic histories have been.

Bibliography
Belich, J. (1996) Making People (Allen Lane, The Penguin Press)
Belich, J. (2001) Paradise Reforged (Allen Lane, The Penguin Press)
Condliffe, J. B. (1930) New Zealand in the Making (Allen & Unwin)
Condliffe, J. B. (1959) The Welfare State in New Zealand (Allen & Unwin)
Easton, B. H. (1994) Towards a Political Economy of New Zealand: The Tectonics of History (Hocken Library)
Easton, B. H. (1997) In Stormy Seas: The Post-War New Zealand Economy (University of Otago Press)
Easton B. H. (2007) Globalisation and the Wealth of Nations (Auckland University Press)
Hawke. G. R. (1985) The Making of New Zealand: An Economic History (Cambridge University Press)
Mein-Smith, P. (2004) A Concise History of New Zealand (Cambridge University Press)
McKinnon , M., with B. Bradley & R. Kirkpatrick (1997) New Zealand Historical Atlas: Ko Papatuanuku E Takoto Nei (Bateman)

Globalisation and Social Democrats

This entry was posted in Globalisation & Trade, History of Ideas, Methodology, Philosophy on 26th January 2008 by Brian Easton.

The Meaning of Globalisation

Globalisation – the integration of regional and national economies – has been one of the great forces which have shaped the modern world. New Zealand would be a very different place had there been no globalisation and its forces continue to influence our world. To what extent we can shape our destiny will depend upon our ability to understand and respond to these forces.

Globalisation is driven by falling costs of distance. A little over two hundred years ago the costs of distance began to decline dramatically. Combined with economies of scale and other new technological innovations they transformed the world. Traditionally, economic historians portrayed this as ‘industrialisation’, but this is a Euro-centric perspective. The concentration of expanding industries in Europe, and later in the Eastern US, was only possible because of the lands which opened up elsewhere, taking their surplus population and providing food. New Zealand was an integral part of the globalisation process.

The Social Democrat Response

The economic transformation created both opportunity and hardship – usually both. Because the economy cannot be separated from society and people, it required a holisitc public response. Inevitably those who had been privileged under the ancient regimes tried to prevent change undermining their privilege. But the forces of globalisation and industrialisation were too powerful for them, although delaying the transformation led to bitter and bloody conflicts. Meanwhile those who were privileged by the new regime chose to interpret it as the best of all possible worlds – even though it was evidently not so for those outside the new elite.

Others engaged with the new economic circumstances. In broad terms you might call this movement the ‘left’. Collectively they were deeply distressed by the terrible social disruption which the economic changes were causing, but they were greatly divided about what had to be done. One group – the nostalgic or conservative left – proposed abandoning the industrial revolution and returning to a rural Arcadia which in fact had never existed. Their views were expounded by Jean-Pierre Proudhon, in a book entitled The Philosophy of Poverty.

Proudhon’s approach outraged others, one of whom wrote a tart reply called The Poverty of Philosophy. His view – the majority view of the left – was that the transforming forces could not be halted and while they were causing enormous devastation to ordinary men and women, ultimately they would be harnessed to the benefit of humankind. The writer was Karl Marx, but he was but one of many nineteenth-century political economy theorists, and indeed, not necessarily the most important until the Russian Revolution in 1917 gave his ideas a prominence which may have astonished those debating with him half a century earlier.

Marx is associated with revolutionary socialism, but the tradition which New Zealand social democracy drew upon was dominated by evolutionary socialists, whose heritage was from Methodism rather than Marxism. It was very broad church but generally its adherents favoured incremental change, steadily modifying the existing system after capturing control by democratic means. Once it thought that public ownership and cooperatives were the answer; today it realises that the socialisation of business is about social control, which can happen when private ownership is subject to social regulation, including the competitive markets, and which better harnesses the enormous energy and innovativeness of private business.

Social democrats use to study the political economy closely. Recently I was rereading some Fabian essays I had read as a teenager and was astonished at the quality of the economic analysis. The writers had read the great economic works of their time, and founded their holistic on them. Democratic socialism was based on mainstream economics and other social sciences.

The Fourth Labour Government

I do not propose to detail the path the social democrats took from the nineteenth century. But I would like to illustrate something about it, by confronting one of the most difficult periods in the history of the New Zealand Labour Party.

I credit the Fourth Labour Government, whose economics we call ‘Rogernomics’, for trying to engage with the challenges that the New Zealand economy was confronting. There were three main ones.

First, the post-war world economy was steadily changing, because of new technologies, increased affluence, and changing balances of power.

Second, in 1966 New Zealand’s connection with the world altered dramatically, when the price of wool fell markedly, so that the pastoral economy and the associated society on which it had been based for almost seventy years was no longer our dominant political economy.

Third, the National government preceding the 1984 Labour government had been timidly conservative. Its leader, Robert Muldoon, probably knew that things had to change but he also knew that change would destabilise the political coalition which he led, a coalition which earlier I characterised as ‘those who had been privileged under the ancient regimes’.

Thus the Fourth Labour Government began with a perfectly standard objective for a social democrat party, of responding to a new political economy. However, its elite got captured by those whom I earlier described as privileged by the new regime. The reasons why this happened are complex, but one was that there had not been enough thinking about economic policy before Labour came to power. Moderating the transforming economic and social system was no longer at the centre of the party’s thinking. As one rogernomics minister remarked to me, ‘all we discussed at party conferences was single issue causes and international issues. Never the economy.’

Whether this gave him and his colleagues the carte blanche to introduce any policy they liked – even ones which advantaged the newly privileged – is a political matter, but that their policies were extremist and incompetent is an economic one. For the record, Rogernomics – and the Ruthanasia-driven National government which followed it – resulted in a five year recession, easily the longest post-war recession.. When the Rogernomes came to power, New Zealand’s per capita GDP was in the top half of the OECD (albeit only just). By the time Richardson left, New Zealand was 15 percent below the average. You will find Rogernomes and their successors excoriating our poor OECD placing, while not mentioning it was their policies that got us there.

I recall this uncomfortable story for two reasons. The first (I’ll come to the second reason somewhat later) was the inability of the party to deal with the underlying economic issues. That nineteenth-century tradition of a left well-schooled in the economics of the day had been abandoned.

Insofar as there was a left-wing economic response it was the conservative economic nostalgia I associated with Proudhon. It was argued there should be no change to the economic system, except that it should spend more on public goods and social welfare. In contrast with the insight showed by the party’s progressive left-wing ancestors, it was a sad stance.

I saw the same problem – the inability to think about the economy systematically – again in 2005. You may recall that the Opposition promised substantial income tax cuts. From the polls it would appear that the promise was worth around 10 seats to them in the election outcome.

There was no question that the Opposition was using voodoo economics to justify their policies. With hindsight we can see that had the cuts been given, the New Zealand economy would have been severely damaged unless there were accompanying savage cuts in public spending. Even so, hardly anyone spoke out against the promises of tax cuts without public expenditure cuts. Of course. Michael Cullen did, but he got very little support. The level of economic literacy had sunk to the point where almost everyone believed the voodoo economics.

This year there is a case for tax cuts because of different economic conditions. We dont know enough about where and when, although the zombies will argue for extravagant ones. Bizarrely, Cullen will be criticised for giving cuts this year but not in 2005, even though he will be one of the few who will be consistent between the two years. Will he get much support from party members?

This replacement of the central concerns of the left – coping with the changing political economy – by single issues and foreign policy is one of the greatest threats to its progress. Sure, there are international issues with which it should be concerned: the left has always been internationalist, but it was not an exclusive interest. Sure, there are particular issues – such as civil rights, injustice, gender, ethnicity, ageism – with which the left should also be concerned. But they need to be seen in the holistic context of how the political economy works.

To give an example, conjure up in your mind a picture of the poor. Was your image of a white couple, with him or both working, and with a housing mortgage? The numbers in poverty are not dominated by people who are brown, single parents, on benefits or living in rented housing. That is what the research says. Those groups are more likely to be in poverty but they are small in numbers, so they dont make up the majority of the poor.

There is a caveat to this research. It is out of date. It may be that the Working for Families package has changed some of the balance. However I’m reasonably sure that the poor will still be a white couple with a mortgage, It is possible they will more likely to be on a benefit, because the package was more supportive to working parents. The one thing I am certain of is that poverty remains dominated by children and their parents.

This is but one illustration of the hard truth that if one does not see an issue holistically, one misses the point. I’m afraid that happens to often today, even among the left.

The Fifth Labour (led) Government’s Response

The second reason why I have brought up the unmentionable of Rogernomics was that there were a few in the party who fought, in various ways, against its policies. Two entitled to particular mention are Helen Clark and Michael Cullen. If you wanted a simple summary of what economic policy has been since 1999, it has been to keep the sensible economic reforms of the 1984 to 1990 period, and to reverse the extremist ones.

I am often surprised how there is so little awareness of this rejection of extremism. Many of the policies of rogernomics which moderates criticised because they would not work, have been markedly modified or reversed because they did not work.

An example is the irresponsible privatisation of Telecom in 1990 without a regulatory framework which would restrain its monopoly powers. It is not just that the privatisation made large profits for the purchasers of the monopoly, but the telecommunications network has not been upgraded fast enough, and we have got steadily behind the rest of the OECD, a particularly serious failure given that telecommunications is integral to this stage of globalisation. At last – and I give full credit to David Cunliffe for this – the government has imposed a competitive regulatory framework over Telecom. No longer can it monopolistically inhibit the innovation and competition that is vital for top economic performance. Ironically, those who supported the unregulated privatisation of Telecom in 1990, today support its re-regulation.

Someone should draw up a list of items where the economic extremism has been reversed. There remains more to do. I’ll give an example shortly. Any reasonably comprehensive list would put to rest the allegation that Cullen, among others, is a Rogernome. Of course, by the standards of those who belong to the nostalgic conservative left, the government has been engaging with the changing political economy, rather than retreating from it. It remains in the tradition of its social democrat predecessors.

And because they have been engaging, the government’s strategy has not been merely defensive, eliminating the bad policies that were made in the past. Even had the social democrat policies which were implemented in the 1980s been sufficient, the world economy moved on and new engagements, new policies are needed.

I could illustrate these challenges in a number of economic areas including the significance of rising affluence and choice, distributional policy, and the pursuit of sustainability. However my time is limited, so I propose to concentrate on globalisation, ruminating on my recent book Globalisation and the Wealth of Nations. Fortunately the omitted issues are interconnected, so I shall be touching upon them.

This government has accepted globalisation is a central fact of modern economic development. The integration of national economies is not going to go away as long as the costs of distance keep falling. Even in the unlikely event that new cost-savings technologies stop, and in the likely event – for a while anyway – that the fuel costs of transport rise, globalisation will continue to intensify as it finds ways of utilising the existing technologies more effectively. My book argues that fuel prices can rise only to a certain level at which the costs of producing alternative fuels set a cap. But even if that were not to happen, the information and communications technology revolution will continue, since it is not very energy intensive. That is why we have to get the regulation of Telecom right.

Future Globalisation

Before we decide how to respond to globalisation, we need to understand its future pattern. The book comes to a couple of surprising conclusions, quite unexpected when I began the study.

The first arises from the well established feature of globalisation that while it lifted most people’s standard of living (including Africans and Indians by about three times in 200 years), the gains have not been evenly spread. As the costs of distance fall, the world’s economic activity concentrates in particular locations to take advantage of the economies of scale. However as the costs fall further, the world’s economy moves back to the pre-globalisation situation where the quantity of economic activity is roughly proportional to population. The theory is not refined enough to tell us when this will happen but we are talking in terms of at leat over the next century rather than in the near future.

Some trends are there already. In the last two decades much economic activity has moved to the population centres of East and South Asia (the Japanese economic achievement throughout the twentieth century is a precursor of this shift). I dont expect their standards of living to catch up to the North Atlantic ones in this century, but Asian economies will grow faster than those of the West.

So instead of there being the single dominant economic power as there has been since the beginnings of globalisation two hundred years ago – first Britain, then the United State – there will be five – the United States, the European Union, China, Japan and India – none of which will be powerful enough to dominate the others. Managing such a world is going to be an enormous challenge.

It is going to be particularly hard for the United States as it loses its economic hegemony (or dominance). I saw the fag end of Britain struggling with its earlier loss. The British public could not understand what was going on: one result was it overspent on military endeavours. I shant be surprised if the US finds the next stage even more difficult. When it is debated in America they see it in terms of a contest for hegemony with another economy – Europe, Japan and China are common candidates. The likelihood that there will be no hegemon has largely escaped them.

But it is going to be tough for all of us. How does a small international player like New Zealand operate in this fragmented world? We have barely begun thinking about the issue, and when we do, we tend to look for a mummy country to protect us. Yet historically when we have had a protector they often disregarded our reasonable interests.

Second, a good piece of news for New Zealand is that food prices are likely to rise relative to manufacturers. Food exporting countries such as New Zealand suffered in the twentieth century from the relative decline in their export prices. The book explains why using a formal globalisation model. The model predicts that when the world starts moving back to a state where economic activity more closely corresponds to population, the price of food begins rising relative to the price of manufacturing.

This shift seems to have already begun. The long term decline in our relative food prices seems to have reversed in the early 1990s and has since been gingerly rising. We should not be surprised. As, say, China, produces more manufactures, their more affluent factory workers want more and better quality food, but their agricultural sector – losing labour to the cities – cannot supply it.

As world food prices rise, we get better prices for the same work, reversing the curse of our twentieth century. The same is probably true for wood, fish and energy including bio-fuels. The challenge for New Zealand is how to seize these opportunities which requires global engagement.

Engaging with Globalisation

One of the Labour-led Government’s policy papers talks about ‘global connectedness’. I dont particularly like the phrase – it sounds as if we are at the listening end of a broadband line. ‘Global engagement’ suggests a more active response. Today I am going to focus on economic engagement, although this is not to diminish the significance of its other dimensions such as foreign policy, overseas aid, science and technology and culture, nor to diminish the government’s achievements in each of them. But first I need to talk about nationbuilding as a foundation of global engagement.

I began my study of globalisation assuming that it would make nation-states obsolete. I knew nation-state were a consequence of globalisation, for they hardly existed before the nineteenth century. Regional integration enabled the centralised political management and population-wide involvement which is at the heart of social democracy. The logic seemed to be that international integration would eliminate national power just as regional integration created it.

But I concluded that while the irrelevance of the nation-state may occur in the long run, it will not happen in the medium future. The evidence, developed in the book, is that nation-states are hanging tenaciously in there, adapting to the evolving circumstances.

Admittedly they are losing their ability to control their borders in terms of the goods and services and investment capital, even though they will continue to control people flows. But that is not enough. To be successful a nation-state has to give its citizens some reason for wanting to be members.

Many of these reasons are not strictly economic. High quality education, environmental, health, justice and social security systems bind citizens into their nation. The public health system probably has the most purchase. (The attempt to Americanise our public health system in the early 1990s was not only an act of technically incompetent ideology, it was also a political misjudgement, especially as the Americans dont like their health system either.)

Nationbuilding

A sense of nationhood is necessary. New Zealand has been very lucky to have had a prime minister who has taken the Arts, Culture and Heritage portfolio. (Clark follows other great Labour prime ministers, Peter Fraser and Norman Kirk, who while not holding the portfolio took an active personal interest in it. So as not to seem partisan I mention Alan Highet and Doug Graham grace National’s record, although the public purse was not as generous to them.) However, national identity is not just arts, culture and heritage. The government has been active in the promotion of sport and of national symbols, such as bringing home the Unknown Warrior.

There is a deeper problem of social fragmentation, which is not peculiar to New Zealand for it is happening everywhere. Distinctive social groups within a nation-state have always existed. A century ago they were hardly in evidence because we thought we could ignore women, Maori and other minorities, pretending that all that mattered were white males. For various reasons, including improved communication, more diversified migration, and a better articulation of humanity that pretence is no longer possible.

Thus far New Zealand has foresworn the path of the intolerance, of majoritarianism in which some minority groups are attacked, some are excluded, and others are terrified into quiescence. Even so, I am still appalled by the provocation of the ‘Iwi-Kiwi’ dichotomy of the 2005 election ad; even moreso that some of its proponents thought it was not divisive. Celebrating the diversity of its peoples and yet maintaining a coherent national identity is one of the greatest challenges to the nation-state.

It is not widely understood that MMP is a response to the social fragmentation. Those who want to return to the pre-MMP winner-takes-all political system are really devotees of the class conflict model of Marx. Strangely, they tend to be on the right in New Zealand. Meanwhile social democrats need to work out more systematically the political implications of the social fragmentation.

What about economic engagement with globalisation? I am going to deal briefly with just four topics. Three are long term strategy issues – border protection, industry promotion and Auckland – and then I shall say something about the implications of the current international financial crisis.

The Protection Issue

This government has resisted the temptation to increase barriers to importing. It is an evolution of the approach in the Kirk-Rowling Third Labour Government, and even the Second Labour Government. (My book The Nationbuilders describes this development.) Even so, for left-wing nostalgic conservatives this opposition to the protection of certain jobs seems to be a betrayal of the First Labour Government.

Two reasons dominate the current stance. First, international trading involves other countries selling to us in exchange for us selling to them. Second, because New Zealand is a small country, we cannot succeed in every high productivity, high income activity. We have to specialise in some production activities and export the surplus to pay for the things we cannot do well.

Even so, it was courageous of the Fifth Labour Government not to retreat to increased protectionism. But a consequence is that some activities have to close down, releasing resources to be redeployed in higher productivity ones. Since almost all protected import substituting industries have gone, some export businesses will have to follow them in the future, in order to transfer their resources – especially workers – into even higher foreign exchange earning industries.

This analysis assumes low unemployment. A social democrat argues that closures during high unemployment should be avoided. But closures when there is low unemployment are also tough on those laid-off. It is one of my disappointments that, given the need for a more dynamic labour market, we have not yet developed the necessary manpower program. We are a long way behind the Scandinavians in helping the redundant and beneficiaries – indeed all workers – find jobs, relocate and upskill, although there is a government working party currently considering these issues.

The Industry Assistance Issue

Can a country do anything to assist industry in the new globalisation era ? While assistance at the border is increasingly internationally proscribed, domestic assistance is often possible. Some is nation-wide and generic, like better infrastructure and upskilling the workforce. Some may be targeted at particular industries. The market is not always the most effective way to promote economic growth for sometimes market signals do not wok properly. Without going to go into detail – this is bread and butter social democracy stuff – I want to make two points.

The first is around the question of whether a government can accelerate economic growth faster than the rest of the OECD. It is clear that poor government policies can decelerate economic growth: Rogernomics and Ruthanasia are evidence of that. But can we make it go faster? Voodoo economics invents some mystical growth rate or relative OECD target, but without any rational explanation of how it will happen.

To be rational, Suppose we knew the magical potion which accelerated economic growth. (We dont, but let’s assume we did.) Then would not all the other OECD countries adopt the potion themselves? So while the whole of the OECD would grow faster, we would not grow faster than the rest. That’s obvious point isn’t? But the rhetoric misses it.

What we can do is make sure that we are keeping up with the rest of the OECD. That is the point of the telecom reforms. We were backward in progressing broadband access, which is so crucial in the next phase of economic development. Now we are trying to catch up. That is what most new economic policy is about. Making sure we dont get behind, in the way that Rogernomics and Ruthanasia did.

The second point is that globalisation with its off-shoring of industry (mainly to Asia) has led to the realisation throughout the OECD that we need to find new industries which the Asians cannot provide – at least in the medium term – because they have not our highly skilled, technologically advanced and creative work forces. This has meant prioritising those industries which depend upon innovation, design, skills and high quality. Often the final routine production will occur offshore, but we get the return from the property rights that come from the innovation and design.

This means there will be an increasing abundance of white coated workers and a reduction in the proportion of blue collar ones This has critical implications for the composition of society. While social democrats should never forget their origins in the turmoil of the nineteenth century, the changing workforce composition is presenting them with new challenges.

The Auckland Issue

The Government calls this redirection of industry its ‘Economic Transformation’ strategy. Let me skip the detail and go to one of its key elements. Innovative industries tend to occur in large urban centres. (The argument is set out in chapter 5 of my book, illustrated with New York.) So our largest urban centre has to function properly. Without it, the economic transformation is not going to work.

That is why the Government is putting a lot of effort into the development of Auckland, including pouring funds into its infrastructure, and trying to resolve its clumsy governance. Politically this is a foolhardy thing to do. Auckland is a political morass with the certainty that if there is the failure Aucklanders will blame the government: if there is success they wont thank it. Yet this government has the courage to tackle the thankless task because it is so necessary.

Meanwhile the rest of the country is grumbling about the special attention which Auckland gets. It does not understand that our economic future is dependent upon getting Auckland right. Actually, it turns out that in some respects Auckland as a geographic entity covers the whole of the North Island. This suggests, incidentally, that Christchurch should be developed as our second global city.

The Current International Crisis and Beyond

My final globalisation topic is a more immediate than these structural issues, but will dominate much of the public economic debate over the next year. Last August the world financial system had a liquidity crisis. When the central banks injected sufficient liquidity to overcome it, it turned into a financial institution balance sheet crisis, which is still working through. Will these weaknesses lead to a world economic crisis?

No one is sure. The US appears to be entering a recession, which is likely to depress world economic growth. Perhaps the whole world will go into a recession – or worse.

We dont know how it will affect New Zealand. There is a bit of panicking going on in the New Zealand sharemarket but, as elsewhere, irrational exuberance had it overpriced. Credit is likely to remain tight. The real test is the extent to which there will be a weakening of the demand for New Zealand exports. It may be that there will not be much. The long term rising price for our food and resource products may shield us from a severe downturn. That will depend on how the rest of the world reacts, including whether it will continue to aggressively seek alternatives to oil and carbon emissions. .

But suppose the New Zealand economy is weaker this year than last, perhaps with rising unemployment. The private sector is not in a good shape to deal with a slowdown, for New Zealanders are carrying too much private debt. Of course they will blame the government, while simultaneously demanding government assistance to offset the mistakes of their extremism.

Because of the prudential management of the government finances – not just by Cullen, but throughout the post-Rogernomics era (the rogernomes were quite improvident) – our government balance sheet is one of the strongest in the world, and well placed to give some assistance to the private sector. Even so, it may not be strong enough to offset a major world downturn.

To the best of my understanding, the New Zealand banking system is also reasonably well placed as the result of the financial surveillance system that has been imposed in the last five years. (The fringe financial institutions were not subject to Reserve Bank overview, and are not always as sound.)

More problematic is the implementation by the Reserve Bank of monetary policy. Introduced in the late 1980s by the Rogernomes, it is one of the extremist in the world, and is almost certainly not flexible enough to deal with the likely economic conditions that we face today.

The problem is not with the Governor of the Reserve Bank. He is constrained by the statutory framework that was imposed in 1990. It is not even with the government who could change that framework if the need arises. It is, rather, that the zombies and their voodoo economics will constrain and delay any necessary government action.

I know this because I went through many of the shallow papers submitted to the Select Committee on Monetary Policy. I know this because I see enough of our professional and journalist writings to know that we cannot think systematically about the potentially horrendous macro-policy problems we are facing. In simple terms we are trapped inside crude monetarism, while the world economic debate is returning to its Keynesian roots.

The Future of Social Democracy

It is not generally appreciated just how intellectually repressive that the Rogernomic and Ruthanasia era was towards dissenting economists. Sure, Muldoon was oppressive too, but he was a practical man and did not stifle robust debate. The ideologists who came after him were intolerant of anybody who did not conform to their pro-rich crude monetarism. Those who dissented were punished with reduced remuneration, loss of status and blocks on promotions, positions and appointments.

The economic debate became timid and mediocre. It is true that universities have been statutorily charged with being critics and conscience of society: Yeah, right. Their timidity and mediocrity appointed others like them, more knowledgeable about an idealised United States economy than they are about the realities of New Zealand. (Recall the attempt to re-dis-organise health services which occurred in the early 1990s.) And that is what they taught the next generation of economists. We have returned to the subservient colonial mentality which our ancestors had tried to eliminate in the half century before 1984.

The attack on economics was also an attack on social democracy. It was not just the intolerance of dissent. Dissent on single and international issues flourished, but voodoo economics triumphed stultifying the holistic social democratic economic debate. Fortunately the momentum from the critics of the 1980s carried forward the Fifth Labour Government, but much remains to be done.

The social democratic project always has things to be done, as long as globalisation and technology continue impacting on society and the environment. That requires institutions and people who are continually thinking afresh, thinking holistically and keeping up with latest economic developments. Social democracy is not about defending the past, nor about obsessively pursuing narrow single issues.

Globalisation and the Wealth of Nations finishes with the famous remark by Marx ‘that philosophers only try to understand the world. The point is to change it.’ But first one has to understand it, to renew social democratic thinking in this green and pleasant land. That is in your hands.

The P Word

This entry was posted in Business & Finance, Listener on 26th January 2008 by Brian Easton.

Public ownership is not as important as public control.

Listener: 26 January, 2008.

Keywords: Business & Finance;

Forty years ago Arnold Nordmeyer, then leader of the Labour Opposition, asked a group of students whether they wanted to nationalise corner dairies. His question has haunted me ever since. We don’t want publicly owned dairies, we don’t want a privatised Treasury – what determines the line that divides the private sector from the public sector?

I realised early that the issue was not really about public ownership. What matters is public control: does the business do what society wants? Where there is pure competition, regulation by the market can be as good as it gets; where there is a monopoly, public ownership is one means of public control, although how the ownership control is wielded is more important.

Sometimes a private monopoly under rigorous regulation will give a better outcome. Sometimes production can be a combination of public and private supply. That was the idea behind public-private partnerships (PPPs) where the private sector provided the capital (say, a school or hospital) that the public sector used. I may be seeing biased samples, but whether they come from Australia, the UK or the US, many of these arrangements have been a financial disaster to the public purse because the risks were stacked against it. Too often the private provider had little incentive to minimise that risk.

Unfortunately the pro-privatisation side of the debate is dominated by business advocates, or their acolytes, who are the beneficiaries of the transfer from the public sector. They claim that privatisation generates greater efficiency, but there is surprisingly little evidence of this. An OECD survey concluded that the efficiency gains came from corporatisation when the government tightened up the running of the public enterprise.

Gains from selling such businesses were much less clear. If there are no national gains from the privatisation, the considerable private profits are made at the public expense of inferior services, higher prices and running down the capital asset. That is what happened in the 1980s and 1990s. Not a few of today’s millionaires were the beneficiaries.

As for the theory that private businesses are more efficient than corporatised public enterprises because their managers are under greater pressure from the threat of a sharemarket takeover, it has no adequate empirical underpinning. Recently, one of its proponents, Michael Jensen, seems to have backed down, because firms behaved differently when his theories were put to the test.

That does not mean we should never privatise. Some of the privatisations in the 1980s reflected the practical assessment that some businesses were on the wrong side of a pragmatically drawn line between the public and private sectors. There is little point keeping an enterprise public if it is in a highly competitive market.

New circumstances change the balance. I advocate tradeable quotas for water, which is a kind of privatisation. My conclusion reflects a careful assessment of their advantages and disadvantages. If there is going to be a world shortage of water, it makes sense to manage ours through a regulated competitive market.

But I am far from convinced that breaking up the public Accident Compensation Corporation monopoly into private competitive supply will prove beneficial to accident victims. Competition works where there are particular market conditions. They don’t seem to apply here, or in some other areas such as education and health care. I cannot see how a television system dominated by advertising revenue can effectively serve its audiences.

Sometimes any small gains hardly justify the turmoil generated by the privatisation or the nationalisation. Yet the transfer involves substantial fees to some of the transactors, who become another self-interested lobby.

General privatisation is not a policy. It is a substitute for a policy, an excuse to dole out generous returns to one’s friends at the expense of the public. Nordy, were he alive today, would be as bemused by the rhetoric of privatisation as he was about the rhetoric of nationalisation 40 years ago.

Those students might be forgiven for being idealists, innocent of tough economic analysis. Today’s advocates are driven more by self-interest. Their public spiritedness is laced with greed. If there is a P-word that matters, it is not privatisation but pragmatism.

Milking the Coconut

This entry was posted in Globalisation & Trade, Listener on 19th January 2008 by Brian Easton.

Coconuts provide wood, mats, thatch, medicine … and a future.

Listener: 19 January, 2008.

Keywords: Globalisation & Trade;

Last November, the Body Shop announced it was shipping 300kg of refined organic coconut oil from Samoa to Britain for use in a new product range to be launched in 2008.

In some parts of the world – virtually all Pacific Islands and on continental tropical shores elsewhere – the coconut palm is so common it would be a weed, were it not so useful. Its fruit – the nut – is a source of food and drink; its coir (the fibre around the shell) is used in ropes, mats, brushes, caulking for boats and as compost; its trunk for wood; its leaves for baskets and roofing thatch; and its roots as a dye, a mouthwash and a medicine for dysentery.

Perhaps its most important commercial resource is copra, the dried meat or kernel of the coconut. Traditionally coconut oil, which is 90 percent fat, is extracted from the copra by grating and grinding and then boiling in water.

The oil can be used for cooking and manufacturing, and as a biodiesel alternative to oil, although not in New Zealand because it freezes at around 25EC. You are most likely to meet it as a skin moisturiser where it seems to have exceptional properties.

Given the ease of growing the palms and processing the nuts, copra is a cheap commodity. Refined coconut oil, which requires higher production standards and superior skills, is expensive, perhaps by a factor of five (plus the cost of an attractive container). The smart producer does not stop at copra, but refines it to the purer product.

I visited one of the sources of this oil last July, when I travelled to Samoa with our Pacific Mission led by Minister of Foreign Affairs Winston Peters.

New Zealand taxpayers do not directly support the small open-air factory that employs perhaps half a dozen men and women – our aid officials would find it very difficult to deal with such small businesses. Rather, NZAID supports the overarching organisation, Women In Business Development Incorporated (WIBDI), which fosters many such small enterprises and is delighted with its new export.

It is WIBDI that ensures that production and quality standards are achieved. Already, it exports coconut oil and handicrafts to Australasia. Hopeful of annual exports of 10 to 30 tonnes a year to the Body Shop in Britain, it is taking on another big challenge.

This represents a different aid strategy from New Zealand’s previous one. During our visit, we drove past timber plantations that were planted many years ago using New Zealand funds. But there had been so many conflicting objectives – between the foresters, the land owners and the workers – that the forests weren’t restored after the devastation of Hurricane Val in 1991. Instead, we switched to empowering the locals.

Commercial businesses involve different ways of thinking about one’s life.

We visited an ie-toga (fine mat) factory where women of the village were weaving. Each mat takes four and more months to make and sells for the princely sum (from a Samoan perspective) of $1000 and more.

The financing for production and the selling in markets far from the factory is done by WIBDI.

The mat-weavers also have household duties. But it dawned on their families that if they relieved them of some of the unpaid housework, the mat would be finished faster and the cash would arrive sooner.

That is exactly the principle of comparative advantage that economists have trouble explaining in more developed economies. Specialisation leads to higher incomes for countries as well as families.

And will it keep them, and later generations, in Samoa?

The mats may seem expensive but the weavers are paid only about $55 a week – the average wage. Presumably families still depend on what they produce for themselves as opposed to the market, including from the ubiquitous coconut palm.

Shirley Smith 1916-2007

This entry was posted in Literature and Culture on 5th January 2008 by Brian Easton.

<>Keywords: Literature and Culture;

<>It is hard to talk of Shirley Smith’s final years, when that extraordinary mind left her long before her body did. Layer after layer of her adult life was stripped away leaving her child-like presence. She still received visitors, ever so politely, and with gratitude, in the way a child might. I recall a companion going through a picture book with her, and Shirley’s delight at discovering a small dog appearing in a corner tapestry.

<>She had had a difficult childhood. Her mother, Eva, had died during an operation a few months after Shirley’s birth. Her father was devastated by the death of his young wife with her beautiful face and a gorgeous head of long curling auburn hair. Despite having grown up in the manse – his father, Gibson Smith, was the minister at the St Andrews-on-the-Terrace where Shirley’s funeral service was held – Sir David Stanley Smith, Judge of the Supreme Court and Chancellor of the University of New Zealand, never went into the church with his family on Sundays, but sat out in the car waiting. What he was thinking?

<>Shortly after Eva’s death he was called up and went overseas, to the carnage of the Western Front. As it happened, the war was over by the time he was ready for the battlefield, and he returned safely.

<>While he was away, indeed until she was the age of six and her father re-married, Shirley was looked after by her maternal grandmother. Eva was her only child, but it was her husband’s second marriage, and she had taken over his first wife’s brood. For the five or so years she stayed with each in turn, with little Shirley (pronounced with a rolled ‘r’, for they were of Scottish descent) in trail.

<>Again, what Nan Cumming thought we can only guess. She was well-off enough to own a home, but she circulated among Shirley’s cousin. Perhaps if David did not return and she died, Shirley would have been adopted as one of their family members; perhaps Nan looked for comfort in the family had she brought up.

<>Shirley often wondered what would have happened had her mother lived. Who knows? It is a matter of record that when she returned to her father’s family, after his second marriage, she proved feisty and independent – her father called her affectionately ‘my little Red Fed’– integral to her character until her last years. It was not until she was about twelve that she decided she had to get on with her stepmother. She must have been grieving, but not for the lost the mother she never knew, but for her grandmother.

<>She returned to that childhood as she drew towards her end. Visitors read poetry to her, especially from her beloved Palgrave’s Golden Treasury which she had had beside her bed since she was a child. Longer poems did not work: initially sonnets did, but increasingly there complexity defeated her. It was a pleasure to read through some old favourites, and it was with sadness I gave up Milton’s “On His Blindness” (True, it was read in part to remind her that even if she could no longer contribute in the way she expected of herself, ‘they also serve, who only stand and wait’.)

<>The signal for the end was her ‘favourite’ poem, an old Scottish ballad “Fair Helen”, I reading, her mouthing it with me.

<> I wish I were where Helen lies;

<> Night and day on me she cries;

<> Oh that I were where Helen lies

<> On fair Kirconnell lea!

<>It was a strange poem to be a childhood favourite. I wondered whether that was the origin of the name of her much loved daughter Helen, but that made it importance even more mysterious. (Shirley was a classics scholar and no doubt the name also referred to Helen of Troy.)

<>Often towards the end,, she would be sleeping with the peace of a child when I did one of my almost weekly visit. But when she was awake we still read poems together. She could read the words, but stumbling and imperfectly as she lost control of her speaking muscles.

<>On that last day she was awake, for some reason I asked her to read ‘Fair Helen’, instead of me. She did so with alacrity, with pleasure and with perfection. There is a theory that one’s early learnings are hardwired into the brain, and it is the software that goes with age. If true, Shirley’s politeness was hardwired by her grandmother. But so was the poem.

<>She read it with a strong distinct Scottish accent. And now I realised its significance.

<>Her grandmother, grieving for her lost Eva, read the poem to her for consolation, passing her aching despair onto Eva’s daughter, even unto her dying day.

<> O Helen fair, beyond compare,

<> I’ll make a garland of thy hair

<> Shall bind my heart for evermair

<> Until the day I die.

<> <> <> <> <>ADDED IN September 2011

<>Sarah Gaitanos, who is writing Shirley’s biography, tells me that Eva was not Scottish . So it seems unlikely that Shirley learned the poem with a Scottish accent from her. Perhaps it was from her paternal grandparents, who certainly were – possibly via her father? That means the last paragraph is not factually correct. But I have left it in, for whatever its truth I have no doubt it captures an essential element of Shirley’s life.

Her Majesty the Consumer

This entry was posted in Business & Finance, Listener on 29th December 2007 by Brian Easton.

The producer is no longer king.

Listener: 29 December, 2007.

Keywords: Business & Finance;

It’s been a long way from the Agricultural Development Council (ADC) of 1963 to last month’s Primary Industries Summit – in both time and head space.

The ADC focused on the pastoral sector. In those days, dairy, meat and wool made up almost 90 percent of export receipts. Today the figure is about 25 percent, although other primary products – fish, forestry and horticulture – take the primary-sector proportion of exports to near 45 percent. The frequently misquoted figure of 65 percent ignores service exports, which make up 30 percent of export receipts. “Invisibles” are not invisible to statisticians.

In 1963, there were glimmerings of the need for diversification and further processing. But the greater difference is that while the 1963 conference was production-driven, there was hardly a mention of production in 2007. The focus was markets.

The earlier conference assumed that we could sell all we produced. There was a concern that this might reduce the prices, but available estimates suggested that it wouldn’t be by much. Overseas markets – mainly the British one – would take all we could send, and pay a fair price.

But although the return on commodities might be fair, it will never be high enough to keep our producers in the manner to which they wish to become accustomed. We need to sell more complex, higher-value products.

The message from the summit was that no longer is the producer king (the implicit message of the ADC). Today the consumer rules, often as queen.

Growing affluence gives consumers choice. They are acquiring “experiences” rather than buying more things. The latter – conspicuous consumption – may remain important for status but often the additional spending is on a holiday, or an exceptional meal.

The affluent population is ageing; increasingly concerned about life-prolonging health and “wellness”, and the quality rather than the quantity of their purchases. Their wealth enables them to express ethical concerns such as the planet’s sustainability. As a result, today’s suppliers who seek a premium price for their products have to worry about freshness and purity, about perceived differences, about branding – at both a national and an individual product level.

A growing concern is a product’s “traceability” through the supply chain, from its carbon footprint to the source of a particular component – say, a chemical – or the quality of the animal husbandry.

There will still be commodity exports. The trick is to fractionalise; to sell milk powder, for example, into mass markets, and other, higher-priced milk products in specific, more affluent markets – yoghurt, for example, or pharmaceuticals.

China and India have almost half the world’s population between them; they also have low average incomes. We mustn’t be seduced by the numbers and ignore the opportunities in more affluent markets. India has more millionaires than New Zealand has people, and they have to be addressed quite differently from the mass milk-powder market.

Another promising mass market is oil alternatives. Rightly, the summit was not obsessed with the (highly subsidised and therefore misleading) US biofuels industry, and instead looked to Brazil. Less was heard, however, about the way in which competition for land for biofuel crops will drive up the price of food.

The change from the ADC to the PIS is a metaphor for the changing world, as we move from mass to niche markets. I fear, though, that it’s also a metaphor for the change in thinking. Many of the PowerPoint presentations had a looseness that was obscured by flashing to the next slide.

Forty-four years on, I can still follow the logic of the ADC. Some of the IPS presentations, however, will seem confusing, if clever, in 44 days – even to their presenters – although there were some excellent ones, too.

The switch from traditional economics to marketing is also a switch from solid thinking to the ephemeral, the shallow, the fashionable – the thinking of the emotional instant.

Public Debate? Yeah, Right

This entry was posted in History of Ideas, Methodology, Philosophy, Listener, Political Economy & History on 15th December 2007 by Brian Easton.

Current economic debate rarely extends beyond hearsay and uninformed opinion.

Listener: 15 December, 2007.

Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History;

Thirty years ago, a large majority of New Zealand economists argued for greater use of the market to regulate the economy. Prime Minister Rob Muldoon was sympathetic, but after almost losing the 1978 election he concluded that the public had not liked his cautious market liberalisations.

Because he also held the finance portfolio, there was none of that creative tension between the short-term political and the long-term economic that makes for good government. Ultimately, he imposed an anti-market wage and price freeze in 1982.

The Labour government adopted a “more-market” approach from 1984, at which point the near unanimity of the economics profession collapsed. There had been cautious liberalisers, moderate liberalisers and extreme ones. The extremists captured power, introducing many policies that were of poor quality, economically damaging and have been – or are being – reversed, to be replaced by the policies of the moderates.

The extremists were just as repressive as Muldoon, punishing anyone who disagreed with them, even if subsequent events proved the critics correct. Many withdrew from the public debate. Today, fewer university economists are involved in the public arena than were in the 1970s. The university contributions to the current hearings of the select committee on monetary policy were disappointing. Their marginal role is especially odd, for the universities have a statutory obligation to be “critics and conscience of society”. As a couple of non-economist academics point out in interviews in Speaking Truth to Power: Public Intellectuals Rethink New Zealand, published in April this year, the universities provide no encouragement for staff to involve themselves in public debate.

The consequence is a watering-down of competence in the economic discussion. The extremists are not held to account. How are they to explain that their policies generated a six-year recession, which dropped New Zealand from the top half of the OECD (just) to well below the median? What defence have they for their failed privatisations and other policies?

The lower-level economic debate makes it easier for the uninformed to think they have something useful to contribute. You see this in our newspapers. They have four-and-more times the number of business pages compared to 30 years ago – their size is determined by the amount of advertising. I bet there are not four-and-more times the number of reporters. One is struck by how often commentary is but unreflective opinion based on fashion, rather than careful, informed analysis based on facts. Today, few people bother to read government or technical papers, relying instead on being told by others what they contain. As a result of these Chinese whispers, interpretations are only tenuously linked to reality.

The economic debate has moved from the general pages into the business section, limiting the public to the sterility of such questions as whether we should have tax cuts. There is no discussion about whether we have the production to pay for them. Celebrities and crime are given greater prominence. Occasionally, when there is a crisis, an economics story appears on the front page. The world financial system has been under severe stress since last August. But where do you see that mentioned in your paper, except when it gets close to home in the form of a local finance company collapse? Even then, little international context is given to the parochial story.

Instead of a vigorous public debate there is ignorance and self-promotion. Participants are out of touch with the general public. (Who would have guessed that a November AC Nielsen poll found those supporting increased public spending were more than double those prioritising tax cuts? The answer may be Helen Clark.) There are hardly any serious attempts to inform the public. We are back to the 1970s and 1980s: “Trust me – I am acting in your best interests.” Yeah, right.

When some hard decisions have to be made – and the international financial crisis is likely to require them – the public will be unprepared and uncomprehending, and will want to return to ineffective anti-market interventions.

A Muldoon-like politician may triumph in the political short term, to our long-term detriment. This columnist will continue to resist both trends.

<>This is the 30th anniversary of Brian’s first Listener Economy column.

The Globalisation Of a Welfare State

This entry was posted in Globalisation & Trade, Labour Studies, Social Policy on 13th December 2007 by Brian Easton.

Chapter 3 of New Zealand, New Welfare, edited by N. Lunt, M. O’Brien & R. Stephens. (Cenage Learning, 2007)

Keywords: Globalisation & Trade; Labour Studies; Social Policy;

In March 1952, just two men were on the Department of Social Security’s unemployment benefit. The rules of entitlement partly determine the numbers, but those registered with the Department of Labour as seeking work at that time would have added perhaps another forty. It was not a census year, but in the Population Census 12 months earlier 7902 men and 288 women had reported themselves as unemployed and actively seeking work. Most felt no need for the Department of Labour’s good offices.

In contrast, forty-five years later in March 2007, surveyed unemployment amounted to 84,000, equally divided between men and women. There is no longer registered unemployment statistics, but the 2006 census reported 106,000 were unemployed, reflecting definitional differences.

Admittedly the labour force is about three times larger, but the quantitative change is dwarfed by the qualitative change. Compared to half a century ago, today’s labour force is more female, browner, older, more skilled, more urban, and more in part-time work (and more productive and better paid).

Wolf Rosenberg (1960, 1977) argued that the labour market is at the heart of the welfare state because it provides jobs and thereby incomes to many families (including saving for their retirement) and its tax revenue is a major source for the government expenditure on other aspects of the welfare state such as education, health and income maintenance.

Other aspects of the welfare state experienced great change in the fifty odd years too: notably the young staying longer in educational institutions, the increased scope – and cost – of health care, the changing structure of the family, and the aging of the population. There is a far greater recognition of social diversity. But while these are global phenomena happening to all rich countries, they are largely independent of globalisation and would probably have happened even had there been no increased integration of national economies. (Easton 2007)

However the labour market has been responding to the pressures of globalisation, so this chapter largely focuses on its response. Just as it and the economy had changed, so the design and operation of the welfare state had to respond.

The Labour Market of the 1950s

In the first two decades after the War there were two dramatic, but inter-related, differences from the 1930s when the Welfare State was conceived in its modern form.

First, the post-war world experienced serious supply shortages including of fibres such as wool and of foodstuffs such as meat, cheese and butter. As a consequence the New Zealand commodity terms of trade – the ratio of the prices for exports relative to imports – was higher in the 1950s and early 1960s than at any other time in New Zealand’s history. Practically that meant that the return for the New Zealand farmer’s effort was high, by international standards. Second, these high returns did not go exclusively to the farmers but were shared by the whole community through a system of protection and related interventions, which forced farmers to purchase New Zealand-made products, even though they could have purchased them more cheaply overseas. More New Zealanders were employed and/or they were paid higher wages. Thus New Zealand was a more egalitarian society and (probably) a higher employment economy as a result of this protection. (Easton 1997: 77-85)

On that foundation the welfare state as we knew it was based. In 1972 the Royal Commission on Social Security codified this post-war evolution. Today the principles it set down may be taken as a summary of the welfare state as it was for the first four decades after the War. (RCSS 1972)

Many economists of the 1950s argued – Rosenberg was not among them – that the low unemployment of the era was inhibiting economic growth. Given that the period was one of high economic growth by subsequent standards, their analysis does not seem to be correct. Admittedly, the high levels of employment seemed miraculous. In fact, as already hinted, the measured level of unemployment was not an indicator of the available labour reserves. Even the Census figure is misleading. Labour shortages could be met from women at home and students, who while not defining themselves as unemployed could be available for work if required, from workers taking a second job and from immigrants. Moreover, while there were skill shortages, the impression is that skill specialities were not as great as today. So the labour market seems to have been able to respond to changes in demand without severe disruption.

But what about the inflationary pressures that arise from labour shortages? Price and wage setting was not as market-based as it is today, with widespread price controls and the wage path, largely determined by the Court of Arbitration, being restrained in order to ensure that the most marginal employees retained their jobs. It seems likely too, that burgeoning prosperity meant that most people, experiencing regular increases in their spending power (except as their children grew up), did not demand maximum returns, but a fair share of a steadily increasing national income.

In those days taxation was not high. In 1952 the average worker paid around 11 percent of his wages in income tax, while the government’s total tax take was only 28 percent of GDP. Then spending on education, health and social security were not as proportionally high as they are today, making up only 22 percent of current central government spending in the 1950s.

Generally, life in the fifties was solid – happy for children, but hardly lively: pudding, not dessert. But this was an interregnum while the world recovered from global war. Globalisation had been a driving force in the international economy since the beginning of the nineteenth century, and while there had been a pause between 1914 and 1950, its pace would soon pick up.

The End of an Era

Long after the world of the 1950s has passed, there remains a widely held regret that it could not be retained, and a belief that the policies which framed it should be reintroduced. Such nostalgia fails to recognise that the particularities which enabled the economy to work the way it did no longer exist.

For politicians do not change lightly a successful regime. Their modifications to the welfare state in the late 1960s and 1970s were a response to forces outside New Zealand’s or the government’s control. They were confronted with a brutal reality that it was no longer working as effectively as it did in the past. Their responses were often not optimal – ‘desperate’ would frequently be a better description.

There is a single day on which the immediate postwar era may be said to have come to an end. On 14 December 1966 the price of wool fell dramatically – ultimately around 40 percent – and, except for a brief period during the international commodity boom of 1972 and 1973, it never recovered. In those days wool made up 40 percent of export receipts: adding in meat, the sheep industry contribution to exports was nearer two thirds. The collapse in the return to sheep farmers meant that there was no longer the income cushion which protection could transfer to the domestic economy. This is well illustrated by the ‘Nil Wage Order’ decision of the Court of Arbitration of June 1968 at which point the wage settlement system broke down despite a later decision to give a 5 percent increase. The effect of the Court’s decision was that the loss of purchasing power from lower export prices had to be shared across the community, just as the benefits from the higher export prices had been in the past.

But whether the cut in spending power was shared or not, there would have had to be a reduction in aggregate spending. The consequence was there was less production, and therefore less employment. For the first time since the beginning of the war, unemployment became evident, with registered unemployment rising to 6600 in April 1968 (while a survey based on the Census definition might have found more than 25,000 unemployed). (Gallacher & Braae 1983) With rising unemployment and downward pressure on both government spending and real wages the foundations of the 1950s welfare state were compromised.

There was no immediate realisation that an era had ended. Indeed, despite being of the political right, the incumbent National Government tried to maintain essential elements of the welfare state. The real benefit level from 1968 was higher than it had been in 1966 or before (albeit it a little lower than its 1967 level), a stark contrast with the vicious real cuts which occurred in 1991 under a later National government facing a less serious situation. But ultimately, if the economy changes than so must the welfare state.

The Rise of Social Diversity

Social changes were also impacting directly upon the labour market and on other parts of the welfare state. From hindsight, it is not obvious that New Zealand was a homogeneous society in the 1950s. But it was perceived and governed as such, with the most common social situation – an (implicitly white) couple with the man working outside the home and his wife looking after the house and some children – taken as a social norm, around which social discourse and policy were built. But increasingly, from the 1960s, diversity became publicly expressed and accepted. Here are a couple of crucial illustrations.

In the 1950s married women were mainly in the home, with most giving up paid work on marriage and some employers even requiring that. Housework was more demanding then – there has been a productivity lift in domestic services too – while typically there were more children. Today most women expect to be employed after marriage and even when they bringing up young children, although often only part-time.

A second dramatic change was the breakdown of marriage-for-life and the concomitant parenting. The consequences of the change became serious enough to lead to the introduction of a non-statutory domestic purposes benefit in 1968. But even when the child remained in a two-parent family, the caring parents might serially change.

These changes steadily undermined the policy – established in the early part of the twentieth century – of a living wage sufficient to maintain a reasonable standard of living for a man, his wife and two (or sometimes three) children, a principle which was enacted in legislation as recently as 1936.

The notion that a basic wage should be sufficient for some standard family is now a nonsense. Most workers do not head a ‘standard’ family, so what might be sufficient for a family man with two children would be generous for a single man or woman and inadequate for a family man with more children. Nor is it clear how it relates to the increasingly common two-earner family (in practice it is often a one-and-a-part earner family) or the 20 percent of women who seem to be choosing not to have children at all.

While it had been long accepted that the state should, to some degree, be responsible for paying for children’s health care and education, by the 1940s there was the realisation that this was not sufficient, and in 1946 the selective ‘family allowances’ of 1927 were replaced by a universal ‘family benefit’. State assistance for the maintenance of children was extended with the (at first discretionary) domestic purposes benefit for single parent families from 1968.

Thus the increasing diversity of family and earnings patterns put increasing expenditure pressures on the welfare state, as did the rise of other types of social diversity.

The Great Export Diversification

It would be too much to expect that New Zealand in the late 1960s grasped the enormity of the economic change it was about to experience, but fortunately it was a market economy – albeit a heavily intervened one – so the external sector followed the price signals.

It is common sense that where there is a collapse in the returns for a key industry, the task is to find alternatives. Which is what happened to New Zealand after 1966. While meat and dairy products remain principal exports (although their composition was changing) today the largest export earner is the tourist sector and exports of energy-based products, fish, general manufactures, horticulture, wood products and professional services exceed wool. Export destinations changed too, with Australia, the USA, Japan, China and sometimes South Korea more important than Britain where two thirds of exports had gone as recently as 1966. (Gould 1982; Easton 1997)

Such an external change impacted on the internal mechanisms which regulate the economy. But these were more under the influence of the government, which was reluctant to change them, since that infringed the power and prerogatives of significant pressure groups.

The most evident breakdown was in wage fixing. The system based on the Arbitration Court lost its authority following the nil wage order of 1968, but was not replaced by a coherent framework until – possibly – the 1990s by which time remuneration (for wages were becoming a smaller part of employee rewards) was set more by negotiation in open markets. In the interim the economy experienced high inflation as the various parties fought to maintain their share of a slower growing economy.

The slow growth also slowed real tax receipts while social change and poor economic performance increased spending pressures, especially those of the welfare sectors. The welfare state was changing.

The New Labour Market

The effect of the export diversification was to expose more sectors directly to the international market. It is not even obvious that the economy could now be divided into the exposed and sheltered sectors. The traditional linkages between wages could no longer be maintained since each factory or skill was experiencing different market conditions. Technical skills became more specialised, increasing heterogeneity and making fixed relativities even more difficult to manage.

The labour market became more dynamic. The Linked Employee-Employer Data base records 1.2 worker accessions (and slightly fewer separations) in the year ending March 2006, when total filled jobs averaged 1.7 million. (SNZ 2007) This, of course, involves some people being involved in more than one accession and separation during the year, but as John McMillan concluded in a review of the flexibility of the New Zealand economy ‘the data indicate that, by and large, the labour market and the financial market are doing their job’. (McMillan 2004)

Moreover, as the rate of technological change accelerated, skill requirements were continually changing, as do international markets, so the incumbent supplier might lose the market and have to lay off workers. Both impact on work practices. The jobs-for-life and a skills-for-life approach of the past has become obsolete. Today’s workers can find themselves involuntarily redundant with a likelihood of a period of unintended unemployment, unlike the 1950s.

The, perhaps unpalatable, fact is that an economy which is engaged in the globalised economy of the world is going to be subject to greater dynamic change and shocks than one which insulates itself. On the positive side, the globally connected economy is also going to produce a higher material standard of living. New Zealand chose the option of greater insecurity and higher incomes. The challenge becomes that as the labour market becomes more dynamic, the extent to which greater protection can be afforded to poorer workers.

Taxing for the Welfare State

Given the increased turbulence in the labour market from the late 1960s, we might expect the spending provisions of the welfare state to change and increase to compensate for the insecurity. But other changes were creating additional demands for spending so that, arguably, the welfare state today provides less of certain sorts of security than it did fifty years ago, primarily because of the difficulty of funding all the demands.

Many of the other expenditure pressures have already been mentioned: longer education (it is more expensive at the older end); the aging population (which has been politically more effective at ensuring its share of national income); healthcare, which is getting increasingly more expensive as its technological possibilities expand; and the needs of increasing diversity.

If in the 1950s the welfare state took up just over a fifth of central government spending today it takes up nearer three fifths (although changes in measurement practices make exact comparisons difficult). Despite reductions in some other components of state spending, the rise in welfare spending has meant there has been a rise in tax revenue as a proportion of national income, and hence of tax rates.

There has been a vigorous lobby which argues that the levels of taxation are too high and are inhibiting economic growth. However, the actual situation is more ambiguous. The pragmatist is likely to conclude that below certain limits the impact of tax levels, if any, is of uncertain sign (it may be positive, it may be negative) but in any case it is very small. What that maximum level is, is unclear. One cannot but observe that the prosperity of high-tax European countries does not seem to have suffered that much. By their standards New Zealand is not a high tax country so it seems reasonable to conclude it is well below the threshold. Moreover, the efficiency of the tax system matters, even if it is difficult to make cross-national comparisons. New Zealand probably has a more efficient tax system than most.

Nor does the international research evaluate much whether it matters what the tax revenue is used for. The public may want the collective services supplied. Some public expenditure may boost economic performance. Some displaces private expenditure: in the case of health services, public funding may be more efficient that compulsory private insurances. For all practical purposes the level of taxation (and its parallel proportion of public spending) is a social choice about the relative balance of the public and private funding of goods and services (and transfers). Within wide limits there appears to be no economically ‘right’ balance: rather it is an ethical judgement.

Given that spending on the welfare state has risen as a proportion of GDP over the last fifty years, the political conclusion must be that the public desires to have a more comprehensive welfare state – or, at least, one which responds to some of the rising pressures. Their voting shows a willingness to accept higher taxation to pay for those desires, even if it reduces their private spending.

But the rising spending alters the political calculations. When the welfare state was smaller (as a proportion of GDP) it could be funded largely by ‘vertical’ transfers from the rich to the poor. As its funding requirements increase, there was greater recourse to ‘horizontal’ funding, that is, transfers between people of roughly the same class in different circumstances, so the current welfare state has more of a social insurance aspect (best captured in the Accident Compensation system) than it did in its earlier form. (Snively 1986, 1988, SNZ 1990, Crawford & Johnson 2004)

There remains a nostalgia for returning to – or at least intensifying – vertical redistribution. While perhaps a different governing coalition might be able to increase the imposition on the rich, there are practical limitations, since in a globalised world the wealthy, corporations and the high skilled are more mobile, and can avoid what they consider onerous taxation by migration. In any case, the rise in the size of the welfare state outlays – almost doubling from about 12 percent of GDP in the 1950s to near 23 percent today – would mean that there would be a substantial rise of the burden of taxation on those on high incomes, were not a greater share born by horizontal distribution.

The Counter-Revolution of the Early 1990s

In contrast to the cautious responses following the 1966 terms of trade collapse, which aimed to maintain the broad principles of the welfare state, the ‘redesign of the welfare state’ in the early 1990s was a counter-revolution, justified as a response to globalisation. The changes in the employment law, the cuts in benefit levels criteria for eligibility, the shifts towards user pays and the privatisation of supply aimed to increase the flexibility of the economy in responding to external change. But the measures also shifted the income distribution towards the rich, and reduced the social protection of workers and the poor. They represented a concerted effort to move to a minimalist (or residual) welfare state. But so radical were the changes, so brutal were the reductions, and such was the reaction of the public to the undermining of ‘their’ welfare state, that measures were subsequently implemented to soften their impact.

Much of this ‘redesign’ of the welfare state has since been reversed. The biggest exception is that benefit levels have been maintained at their 1991 real values (ie. adjusted only for inflation) despite the cuts to well below the 1990 real levels and despite the general rise in real incomes since. This is one of the sources of the increasing inequality that was happening in the early 2000s. Beneficiaries unable to get a job have missed out on the rising prosperity.

The rejection of the redesign program reflects a social decision about the sort of society New Zealanders want to live in, recognising that other economies exposed to the external pressures of globalisation – most notably in northern Europe – have nevertheless been able to maintain a welfare state. Even so the changes which globalisation has caused to the New Zealand economy means the welfare state has to evolve.

A New Welfare State?

It is easy to urge spending more on welfare state activities, ignoring the fiscal constraints. The Labour-led governments of the early 2000s have prioritised job creation, spending on health and education and support for employed families with children, with less attention to social security benefit levels. Even so they may not been entirely successful. There remains a rump of long-term unemployed who seem resistant to both push-into and pull-from the labour market, while the failure to increase the real level of benefits since the cuts of the early 1990s is a contributor to the increasing social inequality. (Perry 2007)

However, to focus only on additional spending – especially if it ignores the fiscal limitations – is to overlook the primary lesson from this chapter. Globalisation has changed the functioning of the labour market, a change to which the traditional welfare state has not sufficiently adapted. The most important change is that there is going to much more involuntary labour turnover. The challenge is how to provide workers with some security, without preventing the necessary turnover that changing technology and demand conditions require.

Yet, it is surprising how little attention, including by workers, has been given to earnings-related transition benefits and to labour market measures designed to upgrade redundant workers job prospects, by – for instance – upskilling.

Of course clumsy policies have evolved, like employer-based redundancy payments and vocational training assistance. But whenever there is an announcement of works closure and job redundancy, the public outcry is as if this is one-off and should be stopped, rather that this is but one of an ongoing sequence of such layoffs , that it will continue, and what is required is the practical response of redeploying the redundant with the minimum of pain.

For the target can no longer be the minimisation of unemployment as it was conceived in the 1950s. The aim today has to be to minimise the stress on the unemployed during the transition between jobs, with an acknowledgement that jobs are no longer guaranteed for life and all workers face the possibility of arbitrary redundancy.

It may be that any employment transition benefit (and also a short term earnings related sickness benefit) could be integrated with the Kiwisaver scheme which provides a long-term second tier (i.e. top-up on New Zealand Superannuation) contribution-related benefit for retirement. (Cabinet Policy Committee 2007) Particular attention would need to be given to the integration between the first-tier (flat-rate, entitlement by need) and the second-tier (earnings-related, entitlement by contribution) components of the welfare state. However these are firmly second tier proposals. As in the case of the Kiwisaver retirement scheme, it is highly unlikely that they will ever generate sufficient income to end the need for a first tier. They are top-ups.

Earnings-related top-ups acknowledge that the loss of income by a high-paid worker shifting onto the unemployment benefit is more immediately severe than the loss by a low-paid worker. Moreover, unlike the existing arrangements, they recognise the existence of two-income families who currently get no social security cover if one loses a job.

Because it is an earnings-related scheme, such a top-up system has to be horizontally redistributive – based on social insurance – and contributory, rather than vertically redistributive. Indeed it is difficult to see how one could construct a comprehensive vertically redistributive earnings-related scheme which would be politically robust.

Distributional Considerations

There is no question that in recent years that on some measures income inequality seems to be rising in market terms, and also in disposable (when taxes are deducted and benefits added) terms, although the latter may be in part be due to the failure to increase social security benefits. (Easton 1996, Perry 2007) It is probably due to globalisation or technological change (or both) although it has to some extent probably been moderated by the rising employment during the 2000s.

However, it is less clear whether inequality is today higher or lower than it was in the 1950s. The fragmentary evidence suggests there may have been reductions in income inequality in the 1960s and even the 1970s which would contradict the nostalgia that the 1950s were a time of low inequality. (Easton 1983) That probably arises from the same source as the belief in social homogeneity: a lack of data and a lack of social perceptiveness. Undoubtedly today people are more aware of social inequality and there is the data to give empirical content to that awareness. Moreover today there seems to be a willingness of the rich to flaunt their wealth in a manner which was uncommon in the 1950s.

Even so the indications are that we are entering a world of greater income inequality than in the early 1980s, although that may not – and need not – mean that there is also necessarily a increase in inequality of opportunity or a sharpening of class divisions. But they may happen.

Conclusion

Much of the discussion on the welfare state is about education, health and social security, and the level of taxation – about its spending and financing. What this chapter demonstrates is that Wolf Rosenberg’s proposition: the welfare state is founded upon the performance of the economy in which the labour market places a crucial role in both that performance and the way in which it transmits the performance to the welfare of households and people.

Thus as the economy has changed, the labour market adapted, and the welfare state has changed too. In particular the increased openness of the New Zealand economy as it responded to the opportunities and changes in the world economy – to globalisation – has dramatically changed the welfare state as it was known fifty years ago.

Nostalgia will not take us back to that state, nor do the nostalgic evidently want to give up the benefits of the opening up – especially the wider range of goods and services and opportunities that it has made possible. The (selective) indignation which often goes with change be unhelpful, unless there is a careful analysis of its causes and consequences. There is the tendency for the indignant to ignore the upsides and focus solely on the downsides, like the consumer eating an omelette and bewailing the broken eggs.

Of course we need to be aware of the downsides of globalisation – not everyone in the labour market is a beneficiary in the short or, even, medium term. The challenge remains as how to minimise the resulting social distress, while maintaining the dynamism and flexibility in the labour market that is necessary to seize the opportunities that globalisation offers.

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Endnote
I am grateful to Elizabeth Caffin, Peter Conway, Jas McKenzie and the editors for comments on earlier versions. Unless otherwise cited all statistics come from official sources, especially the New Zealand Official Year Book of Statistics New Zealand.

References
Cabinet Policy Committee (2007) Increasing Employee Security in Times of Change: A New Approach, POL (07) 78, 30 March 2007.
Crawford, R. & G. Johnston (2004) Household Incomes in New Zealand: the Impact of the Market, Taxes and Government Spending, 1987/88-1997/98, http://www.treasury.govt.nz/workingpapers/2004/04-20.asp
Easton, B. (1981) Pragmatism and Progress: Social Security in the Seventies, University of Canterbury, Christchurch.
Easton, B. (1983) Income Distribution in New Zealand, NZIER Research Paper 28, Wellington.
Easton, B. (1996) ‘Income Distribution’ in B. Silverstone, A. Bollard & R Lattimore (ed) A Study of Economic Reform: The Case of New Zealand, North Holland Books, Amsterdam, p.101-138.
Easton, B. (1997) In Stormy Seas: The Post-War New Zealand Economy, University of Otago Press, Dunedin.
Easton, B.(2007) Globalisation and the Welfare State, Auckland University Press, Auckland.
Gallacher, J. & R. Braae (1983) ‘Employment and Unemployment’, in Easton, B. (ed) Studies in the Labour Market , NZIER Research Paper 29, Wellington.
Gould, J. (1985) The Muldoon Years, An Essay on New Zealand’s Recent Economic Growth Record, Hodder & Stoughton, Auckland.
McMillan, J. (2004) A Flexible Economy? Entrepreneurship and Productivity in New Zealand, http://www.treasury.govt.nz/productivity/workshoppapers2004/pw-mcmillan.pdf
Perry, B. (2007) Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2004, Ministry of Social Development, Wellington.
Rosenberg, W. (1960) New Zealand’s Full Employment Miracle: Can It Last? A.W. & A. H. Reed, Wellington.
Rosenberg, W. (1977) ‘Full Employment: The Fulcrum of the Welfare State’, in A. Trlin (ed) Social Welfare and New Zealand Society, Methuen, Wellington.
Royal Commission on Social Security (1972) Social Security in New Zealand, Govt Printer, Wellington
Snively, S. (1986) Evaluating the Budget’s Distributive Influence on Household Incomes, Thesis presented to the Economics Department, Victoria University of Wellington.
Snively, S. (1988) the Government Budget and Social Policy, Royal Commission on Social Policy, Occasional Paper, Wellington.
Statistics New Zealand (1990) The Fiscal Impact on Income Distribution 1987/88, Government Printer, Wellington.
Statistics New Zealand (2007) LEED Quarterly Tables, http://www.stats.govt.nz/products-and-services/table-builder/leed-quarterly-tables.htm.

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Recession Procession

This entry was posted in Listener, Macroeconomics & Money on 1st December 2007 by Brian Easton.

Ignore the happy brigade. The forces of recession are already in motion.

Listener: 1 December, 2007.

Keywords: Macroeconomics & Money;

Larry Summers, the best economist ever to have been Secretary of the US Treasury, points out that major international financial crises occur about every three or four years. The last – the Enron bust – was five years ago, so we seem due for another. Does the delay mean it will be a big one?

Certainly, the consensus of informed opinion is that the world financial system is suffering severe imbalances. We seem to have come through August’s liquidity squeeze, and are now in the stage in which the financial institutions’ balance sheets are being substantially written down as their lower-quality loans are valued more realistically.

Correspondingly, investors (and even depositors) are losing wealth. Of course, there is always the happy brigade promising that it’s all over – they’ll be selling used cars in their next life – but I do not know of a single international commentator I respect who takes this view.

They are less clear about what happens next. The financial institutions, including the world’s biggest banks, will be writing down their assets for at least another three months. But sharemarkets seem to be wobbly rather than panicking – so far.

Its unwise to focus on the sharemarket. The US sharemarket may have crashed in October 1929, but the US economy didn’t hit bottom till five years later. Real time, when things happen, is much longer than we remember, or the time it takes to read a history.

We are observing the steady unfolding of a period of slower world economic growth – probably a recession – even if the optimistic business commentators continue to focus on daily change.

I am not hinting that we are headed for another Great Depression. We could be, of course, but the economic orthodoxy is that mistakes by the US reserve bank (the American Federal Reserve, or “the Fed”) were responsible for the severity of that one. One academic expert on the 1930s is Ben Bernanke, current chairman of the Fed. If it makes mistakes this time, they will be different mistakes from those of the Great Depression.

Mind you, the most expensive four words in banking are said to be “This time it’s different.” The happy brigade wants to believe them, but the fundamentals of balance sheets always apply, and serious imbalances must unwind, albeit the detail of the paths will differ.

The problem for economists is how these balance-sheet adjustments impact on the real economy (production, consumption and investment). Obviously, some of the spending and investment generated by poor-quality lending is going to stop. Those whose incomes profited from that lending will be spending less, as will those whose investments have been decimated. The reduction in spending will cost jobs: first, in house construction and real estate; later, as all productive investment slows down because it is harder to get investment funds.

That is economists’ broad understanding of some of the mechanisms that lead to an economic downturn. But in real time, not tomorrow.

Underneath is the state of the US Government’s borrowing, which allows it little room for fiscal manoeuvring if the economy implodes. A seeming loss of confidence in the safety of the US dollar adds to the instability. (More of that in a later column.)

Then there are the transaction costs of winding up the thousands of poor-quality US mortgages, and the social heartbreak associated with honest, decent people’s loss of homes, life savings and pensions.

I am listing this train of misery because it is important to understand that these forces are already in motion. But as they are not the stuff of business journalism headlines, the happy brigade is able to promote uninformed optimism.

The message must be: be cautious. Consumers should roll back their borrowing. Investors would be wise to focus on security, even if that means lower rates of return; those making job decisions could consider doing the same.

<>Alternatively, I suppose, you could get into the second-hand car market

What Does ‘hollowing out Of the Economy’ Mean?

This entry was posted in Globalisation & Trade, Growth & Innovation on 25th November 2007 by Brian Easton.

This note was prepared for some colleagues.

Keywords: Distributional Economics; Growth & Innovation;

Th phrase ‘hollowing out’ is often used to cover a multitude of poorly thought through ideas which have lots of rhetoric but perhaps not much intellectual content. Here I am going to try to give the notion some analytical rigour to the notion of hollowing out of the economy as far as New Zealand is concerned. (There is also a literature on the hollowing out of the middle class but that is a different phenomenon. See my http://www.eastonbh.ac.nz/?p=817.)

Hollowing Out and Offshoring

Chapter 15 of my recent book ‘Globalisation and the Wealth of Nations’ discusses hollowing out as a part of policy towards the welfare state. Its basic mechanism is that the process of offshoring – which is an increasingly integral part of globalisation (see chapter 7) – leads to some parts of the labour market being affected more than others. Here is a brief extract form the book:

Throughout the rich world in recent decades there has been a steady ‘hollowing out’ of those manufacturing and service activities whose products are traded relatively easily. Despite the costs of distance, lower-paid offshore workers have become increasingly successful at supplying many products.

The following schematic figure sets out the problem. It divides the economy into quadrants, separating the tradeable sector (the sector exposed to foreign competition) from the non-tradeable sector (which is not exposed directly to foreign competition), and subdividing both sectors according to whether they are dominated by skilled or unskilled labour.

<> <>Economy
<>Tradeable Sector
<>Non-tradeable Sector
<>Labour Force
<>Skilled
<> <> <>Unskilled
<>Hollowed-out Sector
<>

It is the tradeable/unskilled labour force quadrant which appears to be hollowed out by the relocation of manufacturing offshore. There will still be some unskilled jobs in the tradeable sector (such as janitors for high-tech manufacturers), and there will also be unskilled jobs in the non-tradeable sector. But a substantial number of low-skilled jobs will be lost. In this context, ‘skill’ is not some absolute notion. The issue is whether the particular labour skills are available offshore at wage rates low enough to offset the distance costs. If they are, the product will be sourced offshore and local employment will diminish.

Thus the consequence of such a hollowing-out is a fall in demand for ‘unskilled’ workers from the sector. Their personal options are to move to other sectors, to upskill themselves to levels which the offshore worker cannot meet (at least, not immediately), to become unemployed, or to take wage cuts sufficient to make them competitive with the low-paid offshore workers. Other than upskilling – which is unrealistic for some workers, even if the facilities exist – none of these options are particularly attractive to those involved.

The public policy option might be to protect the industries from the offshore competition by measures such as tariffs and import controls, so that local consumers are forced to purchase the product from the more expensive local producers. The fact is the historic tendency has been for public protection to fall, while natural protection from the costs of distance have been also falling.

The bitterly fought case for and against protection is discussed elsewhere in this study. Here we observe that if the rest of the economy purchases high-cost products from a protected sector it is, in effect, transferring income from the general populace to those in the protected sector. Thus hollowing out generates pressures which compromise the social market economy, because it removes from some workers the protection that was part of the historic compromise.

(Moreover there was a second pressure on the social market economy. Although the mountain will not come to Mahomet, Mahomet can go to the mountain: if cheap labour cannot be embedded in exports of goods and tradeable services, the labour may be able to export itself to provide services in the non-tradeable sector. And so the chapter goes on to discuss how unskilled immigrants might also be though as hollowing out the economy.)

The policy implication might be that we need to shift the labour force into areas which are less likely to be offshored (which is what why we should be concerned about upskilling) and into industries which are less prone to offshoring (which is why we should be concerned about the sunrise industries dependant upon new technologies and creativity), and to modify the welfare state (which I have discussed in a recent paper The Globalisation of the Welfare State to be published next year.)

Hollowing Out and the Rising Terms of Trade

There is a particular form of Hollowing Out which is currently puzzling New Zealand, and which is not quite covered by Chapter 15. The analytic foundations are in later chapters in the book, but I wont go into them in any detail.
In the earlier part of the book I am observing the effects of technological change which reduce the costs of distance, and make off shoring more effective. In the later part of the book I observe that the theory also suggests that there will be a long term increase in the price of food (and other resource based products) relative to the price of manufactures – the technical term for this is a rise in our ‘terms of trade’. (There is a heuristic description in a ‘Listener’ column at http://www.eastonbh.ac.nz/?p=867.)

What this means is that certain activities become more profitable (give a greater return on capital). The obvious example is apparent in the rise in dairy prices, but I expect that in due course meat prices will rise too – and also the price for some of our other important exports (fish would seem to be a certainty). Since those activities are more profitable, their production will expand and that involves drawing resources (let’s focus on the labour resource) from other sectors. As it happens (to a first approximation) the resources have to be drawn from other tradeable sectors, rather than from non-tradeable ones, since we are not going to reduce (much) our consumption of those products we cant import. (Tradeable sectors are those whose products can be imported and exported – one of the points the book makes is this now applies to some services.)

That means that the other tradeable sectors – those which dont experience a benefit of higher terms of trade – are going to contract (relatively) as the resources from them get drawn off.

Historically the argument was about the sectors where there was the resource draw-off was the import substituting sectors. As a result we have hardly any import substituting industries left. So the draw-off of resources which the expanding industries needs comes from other export sectors (since it cant come from the non-tradeable sectors and it cant come from the nonexistent import substituting sectors).

This is a long tortuous argument to get to a conclusion which is now obvious and which is happening. We must expect to cannibalise some export industries to make room for expansions in those export sectors which become more profitable form higher overseas prices. That is what we see when various clothing manufacturers offshore their production processes while – and this is important – maintaining their design work in New Zealand.

This is but another example of one of the most routine ways of improving economic performance. Getting out of low productivity industries into high productivity industries is a key element of the economic development strategy, although – wrongly in my opinion – we place little emphasis on that shift at the heart of the development process.

To add three more points:

1. The hollowing out arises because New Zealand is generally benefiting from rising terms of trade. The market economy mechanism which does this is a rise in the real exchange rate. We are seeing that. Had dairy prices not risen as much as they have, our terms of trade would be lower, and so would our exchange rate. (I note that there is a general acceptance that there are other things driving up the terms of trade including the stage of the New Zealand business cycle, the severe imbalances in the world economy, and also – in my view – a monetary policy framework which is overly crude.)
One of the effects of a higher real exchange rate is that some of the gains of the higher terms of trade are shared through the economy as a whole in lower prices to all consumers and not just confined to the dairy (or whatever) sector. At the same time some of the other exporting becomes unprofitable, and so they close down – hence the hollowing out.

2. While higher terms of trade are beneficial for the economy as a whole (obviously since we are getting better prices for what we produce), there will be some people worse off – at least in the short run. The largest group are those who lose their jobs in the hollowed out industries.

3. I have written above what I have understood, but there is much of this process I have not yet understood. Indeed some key questions are not even properly formulated. As a result I am hesitant to come to any policy conclusions about the response to hollowing out, although as best as I understand it, there is nothing in the Economic Transformation Agenda which we would want to abandon had we a better understanding of the hollowing out phenomenon.
I apologise for not having not more enough progress. My book Globalisation and the Wealth of Nations represents an enormous step forward, some of which is beginning to trickle into policy thinking. (Its all obvious of course, once its been explained – like the theory of relativity.) However, when I asked for further funding to progress the work, I was told there were higher priorities. (Some of the higher priorities seem to me to be quite eccentric.)

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