Improving the Electoral System

This is a submission to the select committee considering the Electoral (Reduction in Number of Members of Parliament) Amendment Bill

Keywords: Governance; Political Economy & History;

1. I wish to make a submission on the Electoral (Reduction in Number of Members of Parliament) Amendment Bill. I do so because my book The Whimpering of the State: Policy After MMP, raised some matters which are pertinent to the deliberations of the committee.

2. In particular the Bill does not address the quantum of electorate seats. I shall propose the case for increasing their number.. I will also add, the proposal – not strictly relevant to the bill, but I useful development nonetheless – that the tolerances for electorate size should be reviewed.

3. I do not make a submission on the direct purpose of the Bill, which proposes to reduce the numbers of MPs in parliament from 120 to 100 (overhangs aside). I do not have the expertise to make an informed assessment on this matter. It seems to me to depend upon whether the current number of MPs are under-worked, or whether a smaller number could do the same tasks satisfactorily, without serious overload.

The Number of Electorates

4. However the bill does not address the number of electorate seats. There are currently 69, but the numbers are likely to increase following the Representation Commissions’s review. Because I do not want to pre-judge the Commission’s decisions, this submission is based on the existing number and configurations of electorate seats.

5. In which case the bill offers a choice between 69 electorate seats and 51 list seats in 120 member parliament, or 69 electorate seats and 31 list seats in a 100 member parliament.

6. This is clearly not an appropriate comparison. In once case 57.5 percent of the seats would be electorate ones, in the other it would be 69.0 percent. A better comparison would be a parliament of 120 seats with 83 which were electorate seats, with a parliament of 100 in which 69 were electorate seats. (I am not considering the alternative of comparing a parliament of 120 seats with 69 electorate seats with a parliament of 100 in which 58 were electorate seats because the larger electorates would become even more unwieldy to service by an MP.)

7. In the following I shall largely ignore the problem of electoral overhang, when the number of members exceeds the set number because some party wins more seats than to which it is proportionally entitled by its list vote. This will happen the more electorate seats there are as a proportion of the total quota of members. I can make a separate submission on this matter if the Select Committee requests.

8. The number of electorates in parliament is determined by the requirement that there be 16 general seats in the South Island. This sets the population size of the North Island and Maori seats, and by division into the toal population, the number of electorates. Were there 19 South Island seats then the current (i.e. based on the 2001 census) number of electorate seats in a 120 member parliament would be approximately 82, with 52 (rather than 46) North Island seats, and 8 (rather than 7) Maori seats. (If the South Island number of seats were set at 18, there would be 52 North Island seats and 8 Maori seats. This would number would reduce the probability of a overhang.)

9. I have looked at how this will change the existing electorate boundaries, although because of the changes that will arise as a result of the post-2006 revision, and given also my second recommendation below to change the tolerances the exercise would be largely academic. As a rough rule without a change of tolerances there would be an additional seat in every cluster of six or seven seats if the South Island quota was 19, (or an additional seat in each cluster of eight seats if the South Island quota was 18).

10. A consequential change would be there would be fewer list Members of Parliament. This would largely impact upon the larger parties, who would thereby have more electorate MPs. The smaller parties would remain largely list parties, although given the greater number of and more homogeneous seats they may also have a greater chance of winning electorate seats.

11. The benefit to the population at large and the electorate MPs is that the electorates would be smaller and easier to service (although list MPs also do constituency work).

12. In my judgement that public support for 100 MPs partly arises because of an uncertainty of the role of the list MPs and an affection for electorate MPs. I should not be surprised if there was a considerable public support for more electorate MPs and smaller electorates in a 120 member parliament compared with fewer electorate MPs and larger electorates in a 100 member house.

13. I recommend as a first step towards clarification of the choice between 100 or 120 seats in parliament , that the number of electorate seats be changed so that each option has the same proportion of electorate seats. My preference would be for more electorate seats in the 120 seat option, rather than fewer electorate seats in the 100 seat option.

The Electorate Tolerances

14. The electoral law currently does not require each electorate to have exactly the same population, allowing some variation from the exact population quota. The margin – the tolerance – is that an individual electorate may be up to 5 percent above or below the quota. The Representation Commission is required to take into consideration such factors in community of interest, communications facilities and topographical features when it is setting the electorate boundaries within the range.

15. The existing tolerances predate the MMP era when it was important to avoid gerrymandering because it could affect the balance of parliament. In a MMP system such gerrymandering is less important since the balance of parliament is largely set by the list vote rather than the electorate vote. Since I am suggesting we should review the numbers of electorates, it is also appropriate to consider the size of the tolerances.

16. The narrowness of the tolerances results in some geographically large general electorates. The worst is surely West Coast-Tasman which has a length close to that of the entire North Island, and must be a very difficult to service. Other large electorates include Clutha-Southland, Otago, Aoraki, Rakaia, Kaikoura, Wairarapa, East Cost, Rangitikei, Taupo, Taranaki-King-Country, and Northland. While they may diminish in size with the proposed increase in the number of electorates (if the 120 option is maintained), they will remain large, and perhaps increasingly so, with the shift to urban centres.

17. Not only are these electorates difficult to service by an MP, but unlike many urban electorates there is neither a list MP active in them, nor can a constituent go to easily an MP in adjacent electorate.

18. In principle the Representation Commission could be given total freedom so that it there were no specified limits on deviations from the average. At this stage this may be too permissive. On the other hand, increasing the tolerances slightly and uniformly (say to 6.5 percent) would not address the problem of the West Coast-Tasman electorate and some of the other cumbersome ones.

19. I have thought of various formula of various levels of sophistication. However for the purpose of public debate I want to propose that the Representation Commission be allowed to in the case of up to 10 percent of electorates, that the actual population size may be up to 20 percent less than the average quota where topographical and communications circumstances make a larger electorate difficult to service.

20. I make no proposal for the Maori Electorates which by their nature are going to be large. In any case, the 20 percent toleration would not apply because there are less than 10 Maori electorates. One possibility would be to increase the tolerances for all Maori electorates to 6.5 percent which would be about the average for the General Electorates if my proposal was adopted. (This would not, of course, increase the number of electorates, but might giver the Representation Commission a little more freedom.)

21. I recommended that the current allowances for deviations from population quotas for electorate sizes be reviewed, with the aim of reducing the geographic size of difficult to service electorates.

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Can We Improve the New Zealand Health System?

Keywords: Governance; Health;

Discussions on the effectiveness of the health system need to separate out the funding from the provision. The Labour Government has poured a lot of money into the public health system in recent years (the boost actually began earlier under the National-NZF coalition government in 1996), and it has been disappointed by the results. It has concluded that there is something wrong on the providing side.

I would be a bit more cautious. We dont actually know where the money has gone. Some has gone into public health (such as education and prevention) and, although not all of it has been spent wisely, any benefits will be in the years ahead. Some has gone into primary care, which might be functioning better (although there is a worry about the adequacy of GP’s remuneration), some has gone into high pay for hospital specialist as we compete with rising world medical salaries, and some has been used to deal with the backlog from past failures to provide adequate resources. (Probably some has gone into new technologies which are not very effective or efficient, but that is a world-wide problem.) It is an indictment of the Ministry of Health, though, we know so little about where all the extra funding has gone.

But we should acknowledge success. A recent release from the Minister of Health celebrated that New Zealand had done well in a US comparison of six countries. Here are the broad results, but note the study does not include many of the Europeans nations (such as the Scandinavians) who are the real leaders. Even so, we came second, behind Germany and ahead of Britain, Australia, Canada and the lamentable last of the US.

  AUS CAN GER NZ UK US
Patient Safety 4 5 2 3 1 6
Effectiveness 4 2 3 6 5 1
Patient-centeredness 3 5 1 2 4 6
Timeliness 4 6 1 2 5 3
Efficiency 4 5 1 2 5 3
Equity 2 4 5 3 1 6
OVERALL
RANKINGs
4 5 1 2 3 6

Source

They also gave comparisons of outlays on health. International value comparisons are tricky. The study used the GDP PPP deflators. Forgive me for not going into them in detail, but basically they reflect the price of everything produced. There also exist Health Care PPP deflators (which I dont entirely trust). In the next table, I give the results for both measures.

  AUS CAN GER NZ UK US
Using GDP
deflator
$2903 $3003 $2996 $1886 $2231 $5635
%US 52 53 53 33 40 100
Using Health Sector
deflator
$2970 $2507 $2704 $2205 $2251 $2829
%US 105 89 96 78 80 100

What the data using GDP deflator says is that the US spends the most on health in terms of the GDP it forgoes. But this is partly because the US sector’s remuneration is so expensive (relative to US average wages). When you look at the actual inputs (which is what in principle the Health Sector deflator is doing) it appears that the US is doing relatively less well.

By either measure we are not funding (public and private) the health system as well as the other five. We and Britain are about 20% lower than the US, but we probably spend it more efficiently because relatively more goes into public health, it is allocated more by need and less by ability to pay, there is less defensive medicine here, and a private insurance system is more costly to run than public provision. .

The implication is that we should be spending more on health to be internationally comparable (sorry to have to say that Michael Cullen) , but not a lot more (cheers off stage from Treasury officials). On outturn terms, we seem to be doing reasonably well in comparison with the others.

However there is no health system in the world without public criticism. As I understand it, the government is turning its mind to whether it can improve provision. I shall make just a few remarks.

As a general rule the opportunities for competitive supply are limited in New Zealand. Perhaps in Auckland you can get a choice of hospital for your heart surgery, but you cant in Invercargill. I am not ideologically antagonistic to competitive supply, but the efficacy of competition is frequently overrated.

For instance, health providers tend to compete on the basis of perceived quality without reference to price, rather than actual quality for price. They rely on the uniformed patient to be unable to make efficient price-conscious judgements. (Patients may be also shielded from price by a third party funder – say private insurance.)

Second, those who advocate health insurance are confusing funding with provision. What they are saying, I think when they are not muddled, is that a particular form of health insurance can increase the competitive supply mechanism. Perhaps, and only for selective treatments. In any case, they often dont define what they mean by health insurance – it could range from voluntary private insurance to compulsory public insurance (ACC is an example of the latter) with a host of possible arrangements in between – so the advocation is not making much progress.

(Incidentally, I use to be very nervous over the effect of private purchase of health care (and hence supplementary private insurance), which is sometimes associated with ‘queue jumping’ and superior access for the rich over the poor. I am more relaxed today for the following reasons. If the public sector is effectively utilising all its available funds, then queue jumping is sucking more resources into the health sector, and so is increasing overall welfare. There are a couple of major caveats. First it is possible that the private sector obtains its resources at the expense of the public sector – rather than offshore – which would be to the public detriment. Second – and I owe this to an insight from Geoff Fougere many years ago – a strong health private sector may discourage politicians funding the public health sector.)

Third, there is evidence of dysfunction within the hospital system. I dont hear about all of the DHBs, but too frequently I hear of demoralisation among the clinicians working at the sharp end of the treating of patients. The problem seems to arise from what I called the ‘cult of the generic manager’, the view that this approach to management does not need to know much about the activity it is managing, and so discounts the contribution of professionals to management. ( Some of my writing.)

Its partly an attitude of mind, captured by a research program investigating the DHBs involving interviewing board members and managers. When I asked whether they were also interviewing clinicians, a blankness swept over the researcher’s face. The fact that the clinicians whose success or otherwise would determine the success of the treatment – the ultimate health of the patients – seemed to have completely escaped the project.

We dont know how expensive this management system is. I favour a bench-marking exercise in which individual DHBs report on their management outlays as a proportion of total funds and compare them. (Incidentally, universities do this for their administrative systems.) Of course there will be economies of scale, and there are also effects from service mix and board area. So the data has to be handled sensitively. But you can be sure that were the data available, there would be close scrutiny of the outliers and some of the more pernicious managerial waste would be eliminated.

I hear a lot of grumbling from clinicians about the managers in their hospitals. They may not be entirely right. Clinicians think in terms of their own patients – bless them – and often miss the big picture. That means they can be wasteful of resources, devoting them to their individual patients, and not thinking about whether the resources can be better applied elsewhere where the health gains may be greater. (If you have doubts about this, think of the calls for listing some pharmaceutical for public funding, and how infrequently there is any discussion of the economics of the drug. If there are, how crude and self serving the economic claims are.)

Providing it is not dangerous to the patient’s health clinicians are happy to prescribe procedures whose treatment effectiveness is not well understood, and who efficiency (cost effectiveness) is probably low. Unless they become more sensitive to these issues, they are going to find their clinical freedom will be circumscribed.

However, putting in managers to restrict them may not be particularly effective/efficient either, especially if the managers are unsympathetic to and ignorant of the clinician’s task However anecdotes suggests that many managers dont think enough about clinical delivery, and, like that researcher, lose sight of the sharp end of their operation. I reckon that were one to sack every so often the five percent of managers with the most demoralised clinical staff, there would be a marked improvement in health sectoral performance. But curiously – the adverb is ironic – the theory of management which drives the cult of the generic manager is oblivious to the question of its competence.

These considerations dont solve the problem of provider failure which seems to be the government’s current concern. That is because we are stronger on anecdote than research. One once more wonders about the contribution of the Ministry of Health to providing the rigorous overview which is its obligation.

PS. I am grateful for Rob Bowie ‘s comments on an early draft.

The Youth Labour Market Guarantee: the Environment

This was prepared in May 2006 for a report on a Youth Labour Market Guarantee.
 

Keywords: Education; Growth & Innovation; Labour Studies;
 

Introduction.
 

This paper provides an environment in which any Youth Labour Market Guarantee package must function. It covers the Government Vision statement, the latest Department of Labour 2005 statement The Labour Market and Employment Strategy – Better Work Working, and discussion on measuring the labour market with particular attention to the youth transition.
 

The Government Vision Statement
 

In Growing An Innovative New Zealand (2002) (and subsequently in Sustainable Development for New Zealand: Program for Action (2003)) the government set out its vision for New Zealand as follows:
 

A New Zealand Vision
            • A land where diversity is valued and reflected in our national identity
            • A great place to live, learn, work and do business
            • A birthplace of world-changing people and ideas
            • A place where people invest in the future
 

We look forward to a future in which New Zealanders:
            • Celebrate those who succeed in all walks of life and encourage those who fail to try again.
            • Are full of optimism and confidence about ourselves our country, our culture, and our place in the world, and our ability to succeed.
            • Are a nation that gains strength from its foundation in the Treaty of Waitangi and in which we work in harmony to achieve our separate and collective goals.
            • Are excellent at responding to global opportunities and creating competitive advantage.
            • Are rich in well-founded and well-run companies and enterprises characterised by a common sense of purpose and achievement. They are global in outlook, competitive and growing in value.
            • Derive considerable value from our natural advantages in terms of resources, climate, human capital, infrastructure and sense of community.
            • Cherish our natural environment, are committed to protecting it for future generations and eager to share our achievements in that respect with others.
            • Know our individual success contributes to stronger families and communities and that all of us have fair access to education, housing, health care, and fulfilling employment.
 

In principle this vision should provided a context for all the government’s policies, although perhaps not all government agencies yet take it into account as rigorously as they should.
 

In order to be adopted, any Youth Labour Market Guarantee Strategy must take the Government Vision Statement into account. Fortunately the perspective of the Statement is sufficiently visionary to easily accommodate a policy concerned with the transition of youths from schooling to full adulthood. Indeed, without such a policy the vision will be incompletely fulfilled.
 

The Growth and Innovation Framework (GIF)
 

Growing an Innovative New Zealand (2002) also expounded a Growth and Innovative Framework summarised by the eight points listed below. They are presented here in a slightly different order, to separate out those components of the framework which are primarily about how the economy and economic growth is to be managed, with those parts which are more about the economic outcomes are to impact on people.
 

How the Economy Is To Be Managed
            • A stable macroeconomic framework.
            • An open and competitive microeconomy.
            • A highly skilled population.
            • Sound environmental management.
            • A globally connected economy.
            • A solid research, development and innovation framework.
 

How the Economy is To Impact on Society
            • A modern cohesive society.
            • A healthy population.
            • A highly skilled population.
 

One element ‘a highly skilled population’ has been included in both groupings because it is a key element of the growth, and also because it has considerable impact on the lives of people. It is also central to any Youth Labour Market Guarantee.
 

It is central to economic development, because without a highly skilled workforce, New Zealand industries and workers will be only involved in those production processes which compete internationally with low skilled workers and therefore which can reward only with low pay rates. While such a strategy has little intrinsic merit, it would also mean the out-migration of New Zealanders to countries with higher wages, which would immiserate the economy further.
 

But a skilled population (note not just ‘workers’) also reflects a social outcome consistent with the Government’s Vision. A country which was exceptionally well endowed with some valuable natural resource might be affluent without a highly skilled population (needing some skilled workers, but not all the population). But it would not conform to the Vision.
 

Upskilling occurs throughout an adult’s life, informally in the workplace and home, formally in educational situations. However the most important formal upskilling occurs in the late teen age and early twenties years. This is evident from a cohort comparison shown in the following table:
 

Percentage by Cohort by Highest Qualification



















Cohort: Years Born 1981/85 1981/85 1976/80 1976/80
Census 1996 2001 1996 2001
Age Range 15-19 20-24 20-24 25-29
None 34.4 15.1 20.1 15.8
School Only 60.4 48.4 50.4 41.9
Basic Vocational 3.1 8.3 6.4 6.4
Skilled Vocational 1.1 3.3 6.0 5.8
Intermediate Vocational .2 3.6 1.1 2.9
Advanced Vocational .7 5.3 6.5 8.0
Bachelor .1 11.8 9.5 14.5
Higher Degree .0 2.2 1.9 4.7
TOTAL 100.0 100.0 100.0 100.0
School or None 94.8 63.5 70.6 57.7
Lower Vocational 4.2 11.6 12.4 12.2
Upper Vocational .9 8.9 7.6 10.9
Degree .1 14.0 11.4 19.2
TOTAL 100.0 100.0 100.0 100.0

Source: 1996, 2001 Population Census
 

Unfortunately the data is in five year cohorts but it may be reasonably interpreted that at the age of 17 very few of those born in the early 1980s had any tertiary qualification. Five years on, now in there mid-twenties, a third of them had.
 

Projecting forward using an earlier cohort,[1] and adding the considerable effort since 2001 that has gone into extending tertiary education to a wider section of the community, we must be getting to the stage were almost half of the cohort has some tertiary qualification by the their late-twenties. A few more will get their first tertiary qualification after 30 (and many more will obtain additional and upgraded ones). But the big gains – from zero to half – are in the late teens and early to mid twenties.
 

There are two consequences:
 

First, if New Zealand is to have a ‘highly skilled’ population then the youth transition is crucial (although of course the foundations for this transition are built in the home and the school).
 

Second, a large proportion of the emerging adult population are not ‘highly skilled’. It would be the fallacy of credentialism to say that figure was near a half, since many people have skills without a credential, typically gained from work and life experiences. (Also, sadly, some of the reported credentials are of little value.)
 

In summary, the vison of a ‘highly skilled population’ has yet to be attained. To do so will involve even more effort in the youth transition.
 

The Labour Market and Employment Strategy
 

The Department of Labour’s http://dol.govt.nz/PDFs/better-work.pdf>The Labour Market and Employment Strategy – Better Work Working Better (2005) is a lower level statement of policy principles, providing greater detail but founded on the vision statement and GIF.
 

Its principles apply to all workers and not just those in the youth transition. But they set out a picture of the sort of work experience that New Zealand aims to give all workers, thereby raising the issue that if those are the sort of workplaces that youth are meant to experience, what sort of path in the transition from school to them is necessary.
 

Youth in the Labour Market
 

An important conventional measure of the state of the Labour Market is the unemployment rate which is the proportion of the labour force who are without work. The labour force is internationally defined as those working at least 1 hour per week plus those who without work are actively seeking work (it this group who are the unemployed). On this measure young people experience much higher employment rates than older workers.
 

We should always be cautious proposing non-standard definitions (although always willing to challenge the standard ones in order to understand them better). But in the case of the youth unemployment rate, the statistic can be very misleading.
 

Consider a group of 100 teenagers, 98 of whom are doing courses in tertiary organisations, 1 of whom is in work, and 1 of whom is unemployed (without work but actively seeking work). The unemployment rate on the standard measure is 50 percent. Consider another group of 100, 98 with jobs and 2 unemployed. Its unemployment rate is 2 percent. Despite the second group’s unemployment rate being markedly better than the first, it is hard to argue that the second group is in a better state.
 

The dissonance arises because those in educational institutions are treated as not being in the workforce, perhaps reflecting the time when young people moved directly from school into the labour force. This story is further complicated because there are those in the workforce who are in training, such as apprentices, and there are those who are doing full-time and part-time courses who are also employed for more than 1 hour a week, while if those students without a job actively looking for work are also classified as in the labour force (and as unemployed).
 

In order to avoid the statistical paradoxes, we can treat those young people doing educational and vocational training courses as if they are in the labour force. This will reduce their unemployment rate (the ratio of those unemployed to those in the labour force) because:
            – students studying in formal courses and looking for work are treated the same as others with work but looking for jobs, thus reducing the numerator of the ratio;
            – students doing courses will be treated the same as those with jobs, thus increasing its denominator.
 

Similarly, the change in definition will increase the participation rate (the ratio of those in the labour force relative to the total age group) because
            – students studying in formal courses are treated the same as those with jobs, thus increasing the numerator of the ratio;
            – without changing the denominator of the age group total.
 

The point of this exercise is not to claim that unemployment is lower or participation is higher. It is to get a better comparisons across age groups, one which acknowledges the particular circumstances of the young.
 

Unfortunately the data to do such comparisons has only been collected since June 2004. Moreover the published data is only available on an total basis and not by age groups. The age group figures in the table below are estimated. Nevertheless they illustrate that the size of youth unemployment can be exaggerated.
 

Labour Market: Year ended June 2005.







Age Group Standard
Unemployment
Rate
Adjusted*
Unemployment
Rate
Standard
Participation
Rate
Adjusted*
Participation
Rate
15-19 years 14.2% 5.5% 53.5% 77.9%
20-24 years 7.7% 5.6% 72.5% 80.8%
25-64 years 2.6% 2.5% 68.6% 68.9%
WAP 3.9% 3.1% 67.5% 70.5%

Source: Household Labour Force Statistics.
* Treating Study as Work.
(WAP = Working Age Population)
 

The adjustment by treating study as work halves the late-teenage unemployment rate from 3.6 times the national average to 1.8 times. At the same time the late-teenage participation rate is above the national average if study is included, instead of being markedly below it.
 

This does not reduce the importance of the Youth Labour Market Guarantee. There are still over 12,000 teenagers (and another 12,000 in their early twenties) who are unemployed, and probably making are poor transition to to adulthood. There are others, maybe almost as many, who are so discouraged that they are not seeking work but would take it up, were it available.[2] And as previous sections have pointed out, many young people have jobs, but are not obtaining sufficient skills for long run employment success.
 

Endnotes
[1] Comparing the two middle columns the younger cohort is generally better trained than the older cohort. The one exception is that the proportion of ‘skilled vocational’ is much lower, reflecting the collapse of apprenticeship training in the 1990s.
[2] Those ‘jobless’, which includes others who are not sufficiently vigorously seeking work to qualify as unemployed, is just under double the unemployed for the population as a whole.
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Development & Transformation

Great development economists remind us that we can oversimplify.
Listener: 22 April, 2006.

Keywords: Growth & Innovation; History of Ideas, Methodology & Philosophy;

West Indian Arthur Lewis (1915-91) shared the 1979 Nobel Memorial Prize in Economic Sciences for his work in development economics. His “Lewis” model divided the economy into two sectors – (subsistence) farming and (capitalist) manufacturing. Labour shifting from the first to the second presents a very powerful growth process. I am using his model in my Marsden study on the globalisation of nations (particularly to explain Chinese economic growth). He was also an early advocate of the importance of infrastructure and education in development – views that are today’s conventional wisdom.

Famously, Lewis described economic development as turning a “five percent [of income] saver into a 15 percent saver”. If a country is a low net saver, it has only enough to replace worn-out capital and meet the needs of a growing population. More savings can be invested in more capital per worker, generating higher productivity.

Although he was never awarded the Nobel Prize, German-Jewish refugee Hans Singer (1911-2006), who died last month, made parallel contributions. With Raoul Prebisch (1901-86), he is best known for the thesis that there has been a long-running tendency for food export prices to fall relative to manufacturing prices. My study found this true in the 20th century, but suggests that it may not be true in the 21st.

I most recall Singer, a kindly, courteous man, for his insight that development was turning an 80 percent farmer into a 15 percent farmer. As economic development progresses, the economy’s proportion of farmers diminishes as the manufacturing and service sectors expand. However, and in this respect Singer differed from some of his contemporaries, it is not just a matter of promoting the manufacturing sector. Raising farm productivity is crucial, for the fewer farmers still have to feed everyone.

Both economists were primarily concerned with poor economies, but they also offer critical lessons for rich countries. Economic development is not just about there being more of everything. It is also about the changing balance among sectors.

It is a lesson easily overlooked. There are good political reasons to do so. No sector nor business wants to be told that it is going to grow slower than average. But the lesson’s logic is that, despite the hardship to those involved, some businesses are going to be closed down because their products can be better sourced offshore, with the released resources shifted to where they will be more productive.

Treating the economy as merely GDP can be dangerous. An economy’s output can be thought of as a basket of produced goods and services. It is not just a matter of the basket getting bigger; the composition of the basket also changes. A basket with a fixed composition of product is equivalent to a single-commodity economy.

English economist Joan Robinson (1903-83), who missed out on the Nobel Prize because of politics, although thrice worthy of it, invented the notion of “leets” (the reverse of steel), a general sort of product that can do everything. You eat them, wear them, live in them, travel in them and even use them for health and entertainment. We treat GDP as if it is a basket of leets. Although a single-commodity economy is not very plausible, you would be surprised how often the economy is treated as if it produced only leets. Important economic issues get lost.

For instance, insofar as the Singer-Prebisch thesis is true, it explains many of the difficulties that we, and other rich food producers, have faced. But the argument is unintelligible if we treat both food and manufactures as leets. Another example is that too much of our monetary policy thinking has been based on leets, so that one price index (the consumer-price index) is used to summarise all the complexities of the inflationary process. That leads to ignoring the exchange rate, which, in a single-commodity theory, is unintelligible. What is the point of exporting and importing the same leets? Hence the reluctance of leets-driven economists to think about the external sector.

In order to attain some rigour, we have to simplify. But as British-Hungarian economist Tommy Balogh (1905-85) said, “Rigour can go to the point of rigor mortis.” The great economists of the past were rigorous, but they never forgot the complexity of economies.

‘irrationality’ and Measuring the Social Costs Of Substance Abuse

A note prepared for the International Working Party on Substance Abuse.

Keywords: Health;

Introduction

While considerable progress has been made on measuring the social costs of substance abuse, the question of how to deal with the ‘irrationality’ of consumers has not yet been resolved.

The incorporation of irrationality into actual behaviour does not come easily to economic theory, which traditionally has assumed that consumers are always rational. In recent years however, there as been a characterisation of consumer behaviour which involves time- inconsistency in their decision making.

This paper explores the implications of this characterisation for the measurement of the social costs of substance abuse, and thereby suggests a resolution to the problem of the extent to which the costs incurred by the substance abuser to her or himself should be included in aggregate social costs. The proposed resolution involves an analytical framework, together with the use of an empirical parameter, the estimation of which is hardly discussed here.

Rationality in Consumption – the Standard Account

There is a standard account in economics of how consumers make decisions which involve effects through time. At a very simple level it goes like this.

Each consumer faces a choice between two streams of net benefits reflecting different two different options. In one option the stream might be
b0, b1, b2, b3, …. bi …,

Where bi is the net benefit (benefits less costs) in the ith period.
and the other might be
c0, c1, c2, c3, … ci ….

Note the some of the elements may be negative, that is in a particular time period the costs may exceed the benefits.

In order tho choose between the options the consumer calculates
(1) B = Σbi/d^i
and
(2) C = Σci/d^i
Where
– in each case i is summed from 0 to infinity.
– d is a discount rate (often characterised by 1+r) which reduces the value of future costs and benefits in proportion to the time they are away from the present. Notice that 1/d<1, so the consumer is likely to give little weight to the effects in ten years time, and even less to those in twenty years time.

The rational consumer in the theory then choses the option (either b or c) based on which of B or C is the larger.

It would be foolish to assume that individuals are as calculating as this. However, the basic notion of their taking into considerations of all the costs and benefits to them, but giving less (in a systematic way) weight to costs further in the future seems to be a reasonable characterisation of most people’s behaviour most of the time.

This behaviour is usually called ‘economically rational’.

Irrationality and Time-Inconsistency

In order to give an intuition of the phenomenon being discussed, consider a three period situation where in the first period the individual plans their consumption of alcohol in the second period, and potentially suffers a consequence, say a hangover, in the third. Suppose in the first period, the individual decides that they will confine themselves to, say, three glasses in the second period, thus avoiding a hangover in the third period. However, very often the actual consumption is, say, six glasses and the individual suffers a roaring hangover, laced with the regret that if only they had kept to their first period drinking to plan.

Economists label this ‘time- inconsistency’ which can be defined as situations where, with the passing of time, policies that were determined to be optimal (yesterday) are no longer perceived to be optimal (today). That applies between the first and second period of our example.

Because such terms as ‘rationality’ and ‘irrationality’ and ‘addiction’ are used rather loosely, while there are technical terms like ‘rational addiction’, it is proposed to hereafter call this behaviour ‘time- inconsistency’ and leave others to decide whether it si rational or irrational, or addictive.

This time- inconsistency can be modelled with ‘hyperbolic discounting’ proposed by David Laibson (1997). A simpler algebraic presentation will do for our purposes.

Suppose the net benefit in one course of action, say the restrained drinking, in each of the three periods is b0, b1, b2 (as judged by the consumer), and the other course, the greater imbibing, is c0, c1, c2. Since in our example b0 and c0, incurred while they are planning ,are the same, they may be taken as zero. The second period net benefits (including the offset for the financing of the drinking) b1 and c1 are both positive with c1 the greater because consumption is higher. We assumed that b2 was also zero, there being no hangover or other subsequent costs from the restrained drinking of the earlier period. However c2 is negative.

So the decision-maker faces two streams: cautious drinking (0, b1, 0) and higher imbibing (0, c1, -c2). In the first period the decision-maker does the standard discounting. of the flows and calculates the net benefit of the first option is b1/d and c1/d-c2/d2. (Where, we use, for simplicity ‘d ‘as the discount factor). Since the individual plans the more restrained option we know

(3) b1/d > c1/d – c2/d2
or
(4)b1 > c1 – c2/d.

In the second period the decision-maker faces (b1, 0) and (c1, -c2) which gives exactly the same decision. If b1 > c1 – c2/d, then the choice will remain the restrained consumption. There is time- consistency: the policy chosen in period 1 remains the policy chosen in period 2.

However, sometimes the individual chooses the high consumption option.

So we have to modify the analysis. Perhaps the simplest form of the hyperbolic discounting involves an adaption of the standard discounting rule from
(5 – ie.e (1)) maximise Σbi/d
to
(6) maximise b0 + βΣbi/d.

where β <1. (Were β=1, it would be the time- consistent formula again.)

What is happening is that when making the decision the individual devalues future costs and benefits relative to those in the decision period (above that of standard time- discounting). The smaller the β the less notice is taken of the future consequences of a current decision.

Apply this to the simple example we looked at earlier.

From the first period perspective equation 1 becomes
(7) βb1/d > βc1/d – βc2/d2
which remains as for equation 4..
(8) b1 > c1 – c2/d.
So exactly the same decision is made as in the time- consistent case.

In the next period the sequence (b1, 0) is valued as b1, but the sequence (c1, -c2) is valued as c1 – βc2/d, which is larger than c1 – c2/d.

The decision inequality is no longer (8), but b1 against c1 – βc2/d so that now it is possible (say β = 0) that
(7*) b1 < c1 – βc2/d.
so the consumer would abandon the restrained drinking option, and imbibe more generously. Thus the consumer exhibits time- inconsistency.

This analysis is being applied in many areas of consumer behaviour, including the case for higher sales taxes where such behaviour occurs, demonstrating they may generate a gain in consumer welfare. (O’Donoghue & Rabin, 2003) However, as far as is known, nobody has yet considered its relevance to estimating the social costs of substance abuse.

The Social Costs of Substance Abuse When there is Time-Inconsistent Behaviour

When the social costs of substance abuse is being estimated, one of two options are typically preferred in regard to the costs imposed by the consumption on the consumer. The first is that any costs that a substance abuser causes to her or himself is included in their rational calculation during the consumption decision, and therefore should not be included in social costs since it is offset by the benefit the consumer gets from the consumption. The best known proponent of this view is Gary Becker. (His 1988 paper with K. Murphy defends this view based on rationality but introduces the notion of rational addiction).

The alternative approach has to be to include all the costs incurred by the substance abuser after the consumption (that is excluding the purchase price).

Which is the more correct?

Suppose there is the time- inconsistent behaviour and the consumer takes into consideration only β of the future costs to her or himself. They ignore (1-β) of those costs in their calculations.

This suggests that this (1-β) of the costs should be included in the social costs of substance abuse, because just like the costs to other people, to businesses and to the public sector they are ignored when the consumption decision is made and are not offset by any benefits that the consumer gains from the use.

We can see that those who are arguing that none of the costs which a consumer imposed upon themselves should be included in net social cost, are assuming that β = 1 and there is no time-inconsistency. Conversely, those who argue that all of the costs should be included are arguing that β=0, and there is total time-inconsistent behaviour.

Thus what appears to a be a theoretical dispute proves to be an empirical one, the size of β.

Applying the Consequences of Time-Inconsistent Behaviour to Social Cost Estimates

In the following I am going to assume that the economist’s description of addiction is acceptable to sufficient specialists in the addiction field. Behavioural economics is based on economists’ understanding of the psychological literature. Even so, I have not seen a lot of non-economics expertise supporting it.

In some respects the above resolves a theoretical dispute by showing it is an empirical dispute by proposing to bell the cat. The tough job still has to be done. What are the β?

Note that we are considering only the application of the β to the personal costs to the substance abuser (including sickness and death as well as financial layouts). The costs to others, to businesses and to the government are to be treated exactly as they are recommended in such guideline as Single et al (2000) and Collins et al (2005)

In the current state of knowledge, the best we might get to a guidelines. The following is intended to be indicative – a basis for discussion. Empirical evidence to support some conclusions needs to be scouted out. The last section discusses how to deal with development of addiction.

Narcotics

Perhaps it will be recommended that β = 1 for narcotics, that is the abuser completely discounts the costs incurred. This is an extreme assumption. One could imagine a mild abuser whom we would not call an addict, making calculated assessments of the effects of their consumption including subsequent harm. However since such harm is likely to be small, β is probably very close to unity.

Alcohol

Many people consume alcohol with their β equal to or near equal to unity. But they probably dont cause a lot of damage to themselves. (How much?) What we need is an estimate of the βs for those who consumption leads to significant damage to themselves. It would be easy to assume that for them β = 0, that is they completely ignore subsequent costs when they are drinking. That may be true for some, but is probably not true for everyone (as when one takes just one more than is ‘good’ for one). Note too the relevant β is not the average for addicted drinkers but the average weighted by the self-damage they cause which is likely to be nearer to zero. Probably the required β is very low, but how low?

We need a panel of experts to make an assessment. What empirical evidence might help them?

Tobacco

Unlike alcohol, all smoking of tobacco is self damaging, although because of the damage to the heart (and perhaps for other medical conditions) the damage on average depends upon the age of the smoker.

We also have got past the stage that smokers can claim ignorance of the consequences of their smoking. There may be some – perhaps the very young – and there may be some dangers of which we are not yet aware. But the anti-tobacco/public health campaigns have sufficient effect that the message that smoking is damaging to one’s health is broadly understood by the vast majority of smokers.

More problematic is that much of the damage is some distance in time off. An ordinary discount rate may reduce the significance of the damage to a rational addict so they continue to smoke. We probably need to think more carefully about how this impacts on the social cost measurement. It may differ between the two standard counterfactuals which lead to either avoidable costs or total cost calculations.

But even ignoring this time dimension, there remains the problem of assessing an appropriate β.

When surveyed many, but not all, smokers regret they smoke, saying they would like to give it up. Presumably those smokers have lower βs than unity (although not necessarily zero). But what about those who say they have no regrets? Are their βs unity or are they showing bravado?

And how do we deal with the young? If the costs are low (as on their hearts) or a long way away they might smoke with a β of unity, even though later they incur considerable costs (say cancers precipitated years earlier). The next section discusses a further complication.

It is not evident from this that the relevant aggregate β is close to zero. Again we need a panel of experts to make an assessment. What empirical evidence might help them?

Consuming which Generates Addiction

Currently most behavioural economics assumes the β is given for each individual.

But practically we know of people who start off as non-addicts (β=1) and become addicts (β<1, even 0). It is not hard to envisage that the value of β depends upon past consumption either in terms of aggregates of some nonlinear function where intensity (consumption per unit time) is important.

For instance young people who have never smoked are not addicted to tobacco. As they smoke (presumably discounting the low likelihood of heart disease and the distant likelihood of cancer) many become addicted, their β falling below unity. How do we incorporate that behaviour into the personal costs they generate? Obviously we need to model the phenomenon more precisely than these paragraphs (and the modelling may lead to insights of how to better deal with the young’s pre-addictive behaviour).

And then there will be the task of incorporating the insights into these models, no doubt with some empirical evidence to guide us on the parameters.

Conclusion

Science generally develops by incremental steps. This paper has clarified the dispute between those who want to incorporate all personal costs from substance abuse into social costs estimates and those who argue that none should be included. It has shown that the true response depends on a parameter β which lies between zero and unity which reflect the two extremes of the dispute (and perhaps on some other parameters). However despite the progress, there is much theortical and empirical work to be done.

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Global First

Can We Transform Auckland From A Gateway City to A Global One?

Listener: 8 April, 2006.

Keywords: Globalisation & Trade; Growth & Innovation;

Many cities are gateways, connecting a country or region to the rest of the world. Some are “government” cities, capitals of region or country. But some are global cities, where key global industries boost their size and vibrancy far above their dependence on gateway or government activities.

Most obviously, they are headquarters cities, with the central offices of businesses that sprawl all over the country and world. Headquarters require finance, law, accountancy and other business services that cluster around them. Their workers’ need for leisure means a global city is typically a cultural centre – art, fashion, publishing, restaurants and theatre. Typically, too, it is a centre of specialised medicine and education, made possible by the size and the economic activity that a global city generates. Its size and specialist services may even generate other industries, which could not survive anywhere else in the country.

So will Auckland be a gateway city or a global city? Will it just be the port and service centre for a resource-based economy? Or will it take on the vigour of a global city contributing to a richer, more dynamic, more diversified New Zealand?

The answer is not obvious. As global cities go, Auckland’s population is on the low side, although if the rest of the country works with it, it is probably above the critical threshold. Auckland has governance problems, with far too much conflict between its various local authorities – although recently they have become more co-operative. And it has serious infrastructural problems with water, waste water, energy security, and – most of all – transport congestion. Because the central government is their primary funder, that requires a national commitment.

But should the rest of the country worry? After all, Auckland is an adequate gateway city, with our two biggest international ports, Ports of Auckland and Auckland International Airport, while Warkworth is the primary telecommunications link. If Auckland fails, we can use the Port of Tauranga, Christ-church International Airport and so on.

But do we want New Zealand to be just a resource-based economy? Are we not more ambitious?

A global-city Auckland will make advanced economic activity possible elsewhere in New Zealand. It should be our biotechnology centre – it is near the critical mass already – enabling other biotech businesses to thrive elsewhere in New Zealand. They could not if the nearest centre was in Australia. That may also be true for other industries like fashion and publishing. Workers based in other urban centres or even quiet rural locations will be able to connect electronically to Auckland-based businesses, with only the occasional visit to the Big Kiwifruit to see them.

Business is not the only activity that those outside Auckland will benefit from. Size means that Auckland can provide specialist medical services that would otherwise be available only overseas. It is not accidental that our highest internationally ranked university is based in Auckland. It offers opportunities not available elsewhere in New Zealand and pressures our other universities to perform up there, too. Nor is it an accident that big international conferences like CHOGM and APEC were hosted in Auckland.

So do we want the headquarters of our businesses to be based overseas? Oh, I know many are subsidiaries, but they tell their head offices that things are different here, for they are more responsive to the New Zealand way of life than those offshore can be. Do we really want – as once happened to me – an Auckland answerphone responding by advising its Sydney telephone number?

Some friends recently announced that their son was coming back home. Well, not to his home town. There are no high-finance jobs there. But Auckland is much closer than London. The choice may be regularly visiting one’s children and grandchildren in Auckland, or the occasional overseas trip.

If Auckland is New Zealand’s first global city, will there be a second? Which will it be? I can’t tell, because we do not know enough about the interaction between urban centres and globalisation. What is certain, though, is that if Auckland is not our first global city, there won’t be a second.

Build a Nation

The following was a contribution to the New Zealand Management cover story, “Big Ideas”, of the March 2006 edition. p.30.

Keywords: Political Economy & History;

New Zealand is beset by colonial cringe: we cant do it ourselves and those overseas are better at it. We are followers of the latest fashion, obsequious to third rate foreigners, promoting them and their lack lustre domestic disciples at the expense of quality New Zealand work.

Of course we should follow what is going on elsewhere – confidence in oneself need no mean chauvinism – but the challenge with it is to engage with it rather than slavishly imitate it. What was most wrong in the 1980s’ economic policy (which stagnated the economy for six years, knocking us out of the middle of the OECD, on the GDP per capita measure, down into its lower half), was that we adopted unproven policies fashionable among certain right wing elements in the US, which may not have worked there, and certainly did not work in the very different local conditions here.

Meanwhile we ignored the rest of the US debate, and the more relevant experience of many other countries. We are still doing it. The colonial cringe, following fashion, is the easy path. Keynes, had he been writing in New Zealand, would have talked of practical men and women being slaves of defunct overseas intellectuals.

Thinking for ourselves, adapting the relevant from overseas, implementing it creatively at home, is the tougher course. But without such a commitment, New Zealand will become an increasingly poor offshore neo-colony – as almost happened in the 1990s. We can do better, but first we have to have the confidence in ourselves that we can.

“Brian Easton is an economic commentator and author of The Nationbuilders”, he is currently writing The Globalisation of Nations, with a grant from the Marsden Fund.”

Undermining Governance

Small countries like New Zealand have a comparative advantage in good government.

Listener: 25 March, 2006.

Keywords: Governance;

At the end of the 1970s, we had to decide whether to have a high or low dam on the Clutha River. The Labour Opposition took a firm position. On the same day, its environment spokesperson said the party favoured the low dam, while the energy spokesperson said the party’s policy was for the high one. Mike Moore impishly explained that the plan was to make the dam high on one side and low on the other.

That’s the advantage of being in Opposition. You don’t have to have a coherent policy. Even today, one spokesperson announces that there should be more government spending, another that there should be spending cuts; one that there is too much regulation, another that we need more controls. The impression is of an Opposition that is bereft of discipline, and lacking policy.

The way of covering the policy deficit is an unremitting string of personality attacks, often based on thin allegations, punctuated by feeble calls of “resign”, no matter how distant the Cabinet minister was from the alleged problem. It is surely enough to make a decent person shun a career in Parliament. Fortunately, however, some excellent people were elected to Parliament last year.

This may seem to have little to do with the economy, but in recent years there has been a growing realisation that good governance is crucial for economic success. The parliamentary Opposition attacks have done little to improve its quality – they seem to think there is nothing wrong except they could do a better job. But the personality attacks, from all sides of the House, are undermining the nation’s faith in our governing institutions, while disguising that the critics have no policies – except “tax cuts” (that is for another column). Just what is accomplished in governance terms by hounding a minister to resignation for alleged long-past personal indiscretions?

Because of their greater homogeneity and socially intimacy, small countries, above a minimum size, tend to have better governments than large ones. Things get done efficiently without corruption; there are fewer pressure groups, so problem resolution is easier. The economy benefits. However, the system needs to tolerate diversity, in order to reduce the oppressiveness of the majoritarian state. Toleration liberates economic innovation, too.

Decentralisation is also vital. In The Size of Nations, Alberto Alesina and Enrico Spolaore argue that the one exception of a large state with poor governance is the US, because it is so decentralised that in a sense it is 50 economies. Others argue that the US is not well governed – the economy performs well because of its resource base and the vigour of its people.

A good decentralisation mechanism is the market, which allows price signals to co-ordinate individual decisions. It is not perfect, but in many areas it is the best we have. In others, it is as good as any alternative.

Small countries probably deliver their public spending better than large countries, which means they may spend relatively more. In effect, small countries have a comparative advantage in public spending and good governance.

What about economies of scale – the tendency in some industries and activities for unit costs to fall as production runs get bigger? They rule out small economies producing everything. Instead, they have to specialise, exporting what they can do well and importing what they cannot. The specialisation need not be solely on comparative advantage principles – such as where pastoral products are exchanged for machinery. The competitive advantage of intra-industry trade can mean that we will sometimes export and import similar things: pharmaceuticals to Europe and pharmaceuticals from Europe; IT to the US and IT from the US; films to Hollywood, films from Hollywood. This requires innovation, technical sophistication, high labour skills, design, branding and servicing customer needs. Many small countries meet the challenge. We are going to have to, too.

We rightly fear foot and mouth disease for the damage it can do to our economy. But perhaps the foot-in-mouth disease that bedevils Parliament is a greater threat. Wouldn’t it be awful if an Opposition were to become the government – bereft of policy – and discover that because of their unthinking attacks they have seriously damaged the quality of the governance they were taking over?

Health Status and Income Inequality

This version was revised in March 2006.

Keywords: Distributional Economics; Health;

Introduction and Summary

This paper brings together some recent research about the relationship between health status and income inequality. It focuses upon a set of propositions which challenge the conventional wisdom. They are:

1. That in a rich country poverty – low material standard of living – probably does not directly impact on health, but does indirectly through stress which income differences generate.

2. The increase in household inequality in the period of the late 1980s and early 1990s was more due to changes in tax, benefit, and government spending policies than it was due to market liberalisation. However, the market liberalisation increased stress on New Zealanders.

3. There is some evidence that income inequality may be increasing, due to factors such as globalisation and technological change.

4. The most common poor New Zealand household is a couple with children who are of Pakeha ethnicity, who own their home (usually with a mortgage), and who depend upon wages for their main income. There are other groups who have higher incidence of poverty, but because they are smaller they do not involve as many people. This means that effective poverty eradication involves working on a broad front rather than targeting minority groups.

5. Illness does not correlate well with income, unless age is controlled for. The sick in New Zealand are the elderly, although the paper goes on to argue that policies aiming to reduce poor health in the long term need to target those with low incomes and low in the socioeconomic status hierarchy.

Does Poverty Affect Health?

Much of the international research on the social determinants of poor health in rich countries focusses on the effect of socioeconomic status (SES) – a composite of such things as occupation, education and housing conditions.

However there is not a lot of SES data readily available in New Zealand, so that often household disposable income adjusted for household composition (‘equivalised’) is sometimes used as a proxy, but also because it can be directly influenced by policy instruments. The two variables need not correlate well, for household income varies both in the short term and over the life cycle, while SES is largely for an adult’s life. Life time income would be a better indicator of SES than current annual income, but we do not have much data on that either.

What the international research shows is that there is an ‘SES gradient’, in which those with low SES experience higher morbidity from respiratory and cardiovascular diseases, ulcers, rheumatoid disorders, psychiatric diseases, dementia, a number of cancers, and so on. Often those at the bottom of the SES scale have life expectancies five to ten years shorter than those at the top of the scale (Wilkinson 2000).

Part, but not all, of the differences can be explained by differences in access to health care and by ‘unhealthy life styles’ such as the consumption of tobacco and excess alcohol, lack of exercise and obesity (all of which might be addressed by conventional health care and health promotion policies). Even so, there remains a significant residual which cannot be so readily explained.

The search for alternative explanations has paid much attention to socio-environmental explanations, perhaps intermediated through economic and psychological channels. However, in rich countries there is not a lot of evidence that income has a direct effect on health, even though – as we shall see – the poor tend to be sicker. Unlike those in much poorer countries, the affluent nation’s poor would appear to have sufficient to purchase healthy food, adequate clothing, reasonable housing and so on. (Sapolsky 2004, 2005)

For instance, today’s sickness benefit for a married couple is about 5 percent more in value, after adjusting for consumer price rises, than it was fifty years ago (and the beneficiary is likely to be entitled to more supplements). Yet there are foodbanks today, while there were none in 1956. (We do not know about the homeless, since they were not well monitored then.) The simplest explanation is that real wages (i.e. adjusted for price changes) have risen about 55 percent more in the period. In principle we need to make a host of other adjustments such as for households now earning two wagees but paying higher rates of taxation, but the basic conclusion is that the beneficiaries are relatively poorer and find it more difficult to cope.

This is not to argue that had they more income, they could not improve their consumption for a healthy life style, or that they spend their income wisely. (The same is largely true for those with greater affluence). At issue is that by itself it would appear that income is not a determinant of health, although it is a correlate. Once the minimal resources are available to sustain a basic level of health, absolute levels of income seem unimportant in determining health.

In recent years it has been proposed that the intermediating channel is stress. There is a substantial biomedical literature which has established that individuals are more at risk from stress-sensitive diseases – which include many of those listed above that were associated with the SES gradient – if they
(i) feel they have minimal control over stressors;
(ii) feel that they have no predictive information and intensity of the stress;
(iii) have fewer outlets for the frustration caused by the stressor;
(iv) interpret the stressor as evidence of circumstances worsening; and
(v) lack social support for the duress caused by the stressors. (Sapolsky 2004, 2005)

While there has been less research to test the hypothesis, it is plausible that the poor are subject to greater disease-inducing stress than those further up the income scale. This is not to argue that others do not suffer stress: but that they have better opportunities to cope with it (in terms of the previous paragraph) than the poor.

An intriguing insight is that while the objective state of being poor appears to adversely affect health, the subjective state of feeling poor seems even more important. (Adler 2003) In which case, the notion of relative poverty levels becomes very relevant. Many of the stresses – such as those of inferiority feelings because of low spending power – do not go away just because of a general rise in income. Thus the downside of low income in a rich country involves different mechanisms to that in a poor country. The notion of an absolute poverty line is no longer relevant, while relative poverty is.

It is possible that the observed connection between income inequality and poor health is a stress caused-effect. (Kawachi & Kennedy 2002) The most probable channel is that the lower in the social pecking order, the more likely that it causes stress.

However the stress hypothesis is not confined to a channel to sickness only through household disposable income. Other economic phenomenon cause health damaging stress. The best studied is unemployment where it is clear that psychological and financial stress puts at risk the unemployed and her or his partner. More generally, early life experiences, social exclusion, work and social support as well as unemployment have all been identified as sources of health damaging stress. (Wilkinson & Marmot 1998)

Changes in the New Zealand Income Distribution: 1980s to mid 1990s.

New Zealand household income inequality increased sharply in the late 1980s and early 1990s. Table 1 shows that the shares of the bottom four quintiles of (equivalised) household disposable income fell between 1987 and 1997, with the top quintile gaining the 3.3 percentage points the remaining 80 percent lost.

Table 1: Shares of Household Equivalised Disposable Income by Household Quintile

Year
(Sep or Dec)
Bottom
Quintile
4th Q Middle 2nd Q Top
Quintile
Income
($2004)
1987 10.3 13.7 18.3 24.3 33.3 23,500
1988 10.2 13.5 17.7 24.0 34.7 23,300
1989 10.0 13.2 17.6 23.6 35.6 23,300
1990 9.9 12.6 17.7 24.1 35.7 22,700
1991 9.7 12.3 17.3 24.2 36.5 21,500
1992 9.5 12.2 16.0 24.2 37.3 21,600
1993 9.5 12.4 17.1 24.3 36.7 21,000
1994 9.8 12.3 16.7 24.0 37.1 22,000
1995 9.9 12.6 17.3 23.9 36.3 22,400
1996 9.3 12.1 16.9 24.4 37.3 22,600
1997 9.6 12.1 17.3 23.9 36.6 24,300
2000 9.4 12.0 17.2 24.3 37.2 24,600
2003 9.1 11.9 17.5 24.7 36.8 25,800

Source: Perry 2005.

On some comparisons the increase in inequality was the greatest in the Western World over the period. (Easton 1996)

Unfortunately in 1997, in a cost saving measure, the New Zealand government replaced the annual household survey from which the income shares were derived by a triennial one, so it is more difficult to discern trends afterwards. However, Table 1 indicates the likelihood that the bottom two deciles continued to lose disposable income share, the middle one made some gains but did not recover back to its 1987 level, while the upper two deciles seems to have had a share increase. If so, inequality continued to increase after the mid 1990s, although the following section argues that it may be due to different causes.

Why did the changes in the late 1980s and early 1990s occur? Aside form the complication of the business cycle, three groups of reasons have been considered:
1. The economic reforms involving sweeping liberalisation of the economy (increased use of the market mechanism) from 1984 to 1993.
2. Changes in tax and benefit (and other welfare policies).
3. Fundamental changes in the structure of the economy arising from technical change and globalisation (the external impact of those forces which are integrating the world economy).

Obviously all the explanations had some effect, but a careful analysis concluded the dominant impact came from policies which cut income taxes on the rich which were paid for by higher income taxes on the poor, cuts in social security benefits and cuts in other government services (Easton 1996, 1999).

This is not to say that the other effects were unimportant. Unemployment peaked at 11.1 percent in March 1992, although the percentage at a point in time can be misleading. In the 57 months between October 1988 and June 1993, 754,312 sought work by enrolling on the New Zealand Employment register. (Department of Labour 1994) To give some idea of this magnitude, those who registered as unemployed in the period represent about 47 percent of the the average size of the labour force over the period, or around 10 percent of the labour force each year when the average rate of unemployment at any point in time was 8.7 percent. This overestimates the likelihood of being unemployed because of inflows (from school leaving, returning to work, and immigration), and underestimates it insofar as not all unemployed registered.

Whatever is the true figure, it would appear that a high proportion of the labour force experienced unemployment in the period. Those who enrol more than once, are counted but once in the above total. In fact over 45 percent were enrolled at least twice, and 2.1 percent more than 5 times. This suggests that at least 21 percent of the labour force experienced repeated unemployment in the 4¾ year period, and 1 percent experienced it on five or more occasions. The average number of enrolments was 1.8 times for non-Maori, and 2.2 times for Maori. The average cumulative duration on the register was 59 weeks – the Maori averaged 69 weeks. The register does not pick up all the labour market churning, but it suggest it was substantial in the period.

However, because the stress was substantial it was more evenly spread than at first one might have expected. Similarly, while the liberalisation resulted in people both suffering and benefiting, there is a tendency to focus on the big losses. For instance, substantial reductions of protection on the clothing industry resulted in job losses, but the price of the now-imported clothing fell for the population as a whole. Did those small but widespread gains offset the large losses to a small set of workers? Or – and perhaps this is the more relevant – in the case of each individual did the myriads of small benefits from the ending of protection in many industries offset the one (or more) big employment losses?

If they did not, was there a particular social group of New Zealanders who were privileged by receiving only the benefits but not the downside. When we look at the available data – inadequate though it may be – we can conclude that those on high incomes benefited not from the change in their market incomes but from the marked reductions in income tax they paid. It turns out that many of the rich also suffered – from a loss of wealth, perhaps following the sharemarket crash, perhaps because they too lost benefits from the protection their investments had enjoyed. Equally, there were those on modest and low incomes who would have been better off from the changes, once the terrible transition of high unemployment had worked its way through, except they found themselves paying higher income taxes, or receiving less benefits from the state.

This account keeps to the conventional distributional approach, which largely ignores any economic growth and looks only at distributional shares. But in the six years from 1987 to 1993 average income per head fell. (See the final column of Table 1.) The distributional impact was such that real income fell for the bottom four household income quintiles, but remained (roughly) constant for the top quintile, because the tax cuts offset the fall in their market income. Falling incomes are a further source of stress (although again there is considerable churning).

Changes in the New Zealand Income Distribution: After the mid 1990s.

We need not report the details of the distributional policy changes which occurred after 1996, merely noting that there were both progressive and regressive changes, but none were of the redistributive magnitude of the earlier period. Because of the data gaps it is also harder to assess whether there have been major redistributional changes since 1996.

However there seems to have been a tendency for increasing inequality, but this time the changes involve more the bottom two quintiles losing and the top two (or three) quintiles gaining. This suggests a different redistributive mechanism from that of the previous decade. (See also Dixon (1998) for more clues.)

There is a vigorous debate about the extent to which the forces of globalisation and technological change are modifying the income distribution of rich countries. It can be only sketched here, beginning with a simplified account of how globalisation may impact unfavourably on the rich country’s income distribution.

In the following schematic figure the economy is characterised by quadrants, by dividing it into a tradeable and non-tradeable sector (the sector exposed to overseas competition to that which is not exposed) and a skilled and unskilled labour.

  Tradeable Sector Non-tradeable Sector
Skilled    
Unskilled Hollowed out?  

It is the tradeable sector/unskilled labour force quadrant (in the South-West of the block) which appears to be ‘hollowed out’. The most evident example is demise of the textile, clothing and footwear industry. There will still be unskilled jobs in the tradeable sector (e.g. janitors for high tech food processing) and there will also be unskilled in the non-tradeable sector (such as in rest-homes). However one would expect that major job losses in the hollowed-out quadrant would reduce unskilled wage rates elsewhere. Unskilled wage rates are low, and wages are an important component of low income households (see below). Such changes may have contributed to the increased inequality that appears to have ben occurring in the late 1990s. The effect of the hollowing out from globalisation is therefore increased income inequality unless there is an upgrading of skills in the labour force.

Broadly the same story applies for technological change except in this case the (relative) reduction in unskilled jobs is the result of technical change favouring skilled jobs (and it is unnecessary to make the tradeable versus non-tradeable sector distinction, since the technological change can occur in either sector or both of them). Again, unless there is sufficient upskilling of the labour force, there will be downward pressures on unskilled wage rates and increased household inequality.

Who Are The Poor Households in New Zealand?

I now report some research which Suzie Ballantyne and I did using the Household Economic Survey (HES) for the three year period covering 1994/5-1996/7 when the HES included questions on the respondents’ recent utilisation of health services together with a subjective assessment of each’s health status, as well as socioeconomic variables such as income and expenditure and personal characteristics. (Easton 2002, Easton & Ballantyne 2002)

Our work involved detailed econometric analysis, with considerable more care taken in the application of the household equivalence scale, which adjusts for household composition, for housing (since outlays are different for those who own their houses and those who rent), and for the choice of poverty line. The following tables are based upon the Michelini equivalence scale, income econometrically adjusted for housing circumstances, and a poverty line based on the benefit datum line of the Royal Commission on Social Security, although using other assumptions will not markedly change the broad conclusions.

Table 2 shows the proportion in poverty and the proportion of the poor by household type. While the highest incidence of poverty is among households consisting of a single adult with children – as is frequently commented upon – they make up only a sixth of the poor. In contrast households with two adults and children have less than half of the poverty incidence of the single parent households, but make up more than twice its numbers. This illustrates the danger of focussing on solo parents, and ignoring the vast majority of the poor, who are children and their parents, most of whom live in two adult homes. Households with children contain over four fifths of the poor.

Table 2: Poverty by Household Type

  Proportion in Poverty Proportion of the Poor
Adult not in Labour Force    
Adult in Labour Force 4.6 1.6
2 Adults, neither in Labour Force 2.6 0.4
2 Adults, 1+ in Labour Force 6.0 3.5
1 Adult with 1+ Children 4.0 4.4
2 Adults with 1 Child 38.7 16.3
2 Adults with 2 Children 13.9 7.6
2 Adults with 3+ Children 21.5 18.0
All 2 Adult with Children
Households
18.4 42.3
3 Adults without Children 7.2 8.0
3 Adults with Children 22.8 23.5
In Households with Children 21.9 82.1
In Households without Children 5.5 17.9
ALL 14.2 100

Source: Easton and Ballantyne (2002)

Table 3 looks at the poor by ethnicity and shows the same pattern of differences between proportion in poverty and proportion of the poor. Non-Pakeha poverty is higher than Pakeha poverty. Yet almost three fifths of the poor are Pakeha (because there are a lot more of them).

Table 3: Poverty by Ethnicity

  Proportion in Poverty Proportion of the Poor
Pakeha 10.7 58.5
Maori 23.7 19.9
Pasifica 33.4 11.8
Asian 26.3 9.8
ALL 14.2 100

Source: Easton and Ballantyne (2002)

Similarly, Table 4 cutting the data by housing tenure, shows that renters have the highest incidence of poverty, but that over half of the poor live in their own homes.

Table 4: Poverty by Housing Tenure

  Proportion in Poverty Proportion of the Poor
Rent 27.3 47.4
Own with Mortgage 13.5 37.5
Own without Mortgage 6.0 15.0
Rent Free 1.2 0.1
ALL 14.2 100

Source: Easton and Ballantyne (2002)

It is messier, but it can also be shown that the poor households are more likely to receive market income (wages) then depend on benefits. (Nevertheless beneficiaries with children are more likely to be in poverty.)

In summary, the most common poor New Zealand household is a couple with children who are of Pakeha ethnicity, who own their home with a mortgage and depend upon wage income. There are other groups who have higher incidence of poverty, but because they are smaller they do not involve as many people.

There is a tendency for poverty rhetoric to emphasise single parent households, ethnic minorities, renters, and beneficiaries. The reality is while a household with any of these features is more likely to be poor, the poor are more likely to be mirror images of the characteristics. The policy implication is that poverty eradication involves working on a broad front rather than targeting minority groups. If there is a typical poor household, it is one which contains children.

The Location of the Sick in the Income Distribution

The particular advantage of the years the study used was that respondents were asked to rate their health status on a scale ‘excellent ’, ‘good’ ‘fair’ or ‘poor’ health. Very few categorised themselves at the bottom, so we combined the two into a single category. Some 8.6 percent of the population were in it. Note the health rating is self reported and subjective.

Again there is an apparent paradox in the results, for the sickest are more likely to be in the middle quintile than the bottom quintile of the overall household distribution. (Table 5)

Table 5: Percent of Total Who Rate Themselves As ‘Fair’ Or ‘Poor’ Health

  Bottom
Quintile
4th Q Middle 2nd Q Top
Quintile
ALL
ALL 21.7 25.3 25.5 16.3 11.2 100

Source: Easton and Ballantyne (2002)

However an examination of the characteristics by age and gender shows that the poorest in each category have the highest incidence of poverty. (Table 6) The old are the sickest – over half of those in the fair or poor categories are aged over 65 – but they are not as poor as the young. As far as poor health is concerned, age is a more important determinant than income.

Even so, within age groups, those in the lowest income quintiles tend to be the sickest. The gradients vary (and are erratic, presumably because of the low numbers involved) and they seem to be stronger for females than males, which itself constitutes a puzzle – perhaps the females are under more stress.

What the gradients suggest for those under 65, is that health levels in those in the middle three household quintiles are much the same. But poor health is markedly more common – typically about double – for those in bottom quintile households.

Those in the top income households tend to have fewer who are in inferior health. Does their income enable them to purchase better health care? Are they suffering less illness inducing stress? It cannot simply be that those adults with poor health tend to sink into lower income groups because their earning power suffers, since children in such households who are less likely to compromise the family income, are also in better health.

Table 6: Incidence (%) Who Rate Themselves As ‘Fair’ Or ‘Poor’ Health

  Bottom
Quintile
4th Q Middle 2nd Q Top
Quintile
ALL
Under 15 Female 7.4 3.6 2.9 3.1 1.2 4.5
Under 15 Male 5.8 5.8 3.4 3.0 3.1 4.7
15-64 Female 19.7 11.0 8.7 7.2 3.9 7.9
15-64 Male 10.2 8.3 7.4 4.2 3.8 6.2
Over 65 Female 42.5 29.4 27.5 22.3 21.2 26.5
Over 65 Male 40.2 29.8 25.2 21.3 19.4 25.5
ALL 9.3 11.0 11.0 7.0 4.8 8.6

Source: Easton and Ballantyne (2002)

Conclusion

This chapter has focused upon a set of propositions which may be summarised as :

1. That in a rich country poverty – low material standard of living – probably does not directly impact on health, but does indirectly through stress which income differences generate.

2. The increase in household inequality in the period of the late 1980s and early 1990s was more due to changes in tax, benefit, and government spending policies than it was due to market liberalisation. However, the market liberalisation increased stress on New Zealanders.

3. There is some evidence that income inequality may be increasing, due to factors such as globalisation and technological change.

4. The most common poor New Zealand household is a couple with children who are of Pakeha ethnicity, who own their home (usually with a mortgage), and who depend upon wages for their main income. There are other groups who have higher incidence of poverty, but because they are smaller they do not involve as many people. This means that effective poverty eradication involves working on a broad front rather than targeting minority groups.

5. Illness does not correlate well with income, unless age is controlled for. The sick in New Zealand are the elderly, although the paper goes on to argue that policies aiming to reduce poor health in the long term need to target those with low incomes and low in the socioeconomic status hierarchy.

The policy conclusions might be that there is an socioeconomic (SES) gradient on health status, services whose purpose is to provide health care to individuals need to take more into consideration the age of the local population.

However where services are aimed at the entire population need to take more into consideration the age of the local population, aiming to raise health status in the long term, the international research evidence suggests SES effects appear to be important.

How to target the SES effectively is another matter, especially as it is not the same as income (or even lifetime income, although that would give a better correlation). It seems likely that reducing income inequality may help – especially perceptions of income inequality, and or its importance. (If so the largest single cause of inequality is having children.)

But it may be also possible to address some of the stress channels directly. Certainly it makes sense that for any policy change, that there needs to be an accompanying audit of what stress it will generate and to what extent the further stressed will be able to deal with it.

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References
Adler, N.E. (2003). ‘Looking beyond the borders of the health sector: The socioeconomic determinants of health’ in E.R. Rubin & S.L. Schappert (ed) Meeting Health Needs in the 21st Century (Association of Academic Health Centres Washington, DC) p.14-27.
Department of Labour (1994) An Analysis of the Dynamics of the Registered Unemployed: Exit Probabilities and Repeat Spells (Department of Labour, Wellington).
Dixon, S. (1998) ‘Growth in the Dispersion of Earnings: 1984-1997′, Labour Market Bulletin , p.71-107.
Easton, B.H. (1996) ‘Income Distribution’, in B. Silverstone, A. Bollard, & R. Lattimore (ed) A Study of Economic Reform: The Case of New Zealand (North Holland) p.101-138.
Easton, B.H. (1999) ‘What has Happened in New Zealand to Income Distribution and Poverty Levels,’ in S. Shaver & P. Saunders (ed) Social Policy for the 21st Century: Justice and Responsibility (SPRC, Sydney) Vol 2, p.55-66.
Easton, B.H. (2002) Validation and the Health and Household Economy Project , Paper to the Wellington Health Economists Group,
Easton, B.H. & S. Ballantyne (2002) The Economic and Health Status of Households , (Wellington School of Medicine)
Kawachi, I & B.P. Kennedy (2002) The Health of Nations: Why Inequality Is Harmful to Your Health (New Press).
Perry, B. (2005) Social Report Indicators for Low Incomes and Inequality: Update from the 2004 Household Economic Survey (Ministry of Social Development, Wellington)
Saplosky, R. (2004) Why Zebras Don’t Get Ulcers : A Guide to Stress, Stress Related Diseases and Coping (Harry Holt & Company)
Saplosky, R. (2005) ‘Sick of Poverty’, Scientific American , December 2005, p.72-79.
Wilkinson, R. (2005) The Impact of Inequality : How to Make Sick Societies Healthier (Routledge)
Wilkinson, R & M. Marmot (1998) The Social Determinants of Health: The Solid Facts (WHO)

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Macro-economic Thinking

Why have the do-nothing policies of the 1980s gone out of fashion?

Listener: 11 March, 2006.

Keywords: Macroeconomics & Money;

Just under 20 years ago, the Kiwi dollar was overvalued. A spendthrift government was running a large internal deficit that had to be financed by borrowing. As the offshore loans flooded in, attracted by high interest rates, the exchange rate (the Kiwi dollar relative to overseas currencies) was pushed up.

Exporting became less profitable and importing more profitable. Export firms stagnated, those that competed against imports closed down, there was widespread unemployment, and the economy stagnated, with six years of falling per capita output. In 1985 we were in the top half of the OECD on a per capita GDP basis (just). By 1993 we were about 20 percent below the OECD average, securely in the bottom half.

At the time, the conventional wisdom said that the exchange rate was determined by the market. There was nothing that policy could usefully do about it, they confidently said. Interfering would only make things worse …

A waking Rip van Winkle from those times would be greatly puzzled by today’s policy debate, which says that the government ought to do something about our high exchange rate, which is once more strangling the export sector (there is hardly any import substitution left) and which promises to stagnate the economy again. We may not agree about what the Minister of Finance and the Governor of the Reserve Bank should be doing, but we seem to agree they should be doing something. What is the difference, Rip might ponder. Why have the do-nothing policies of the 1980s gone out of fashion?

An easy answer is that the policy advisers of the 80s, much honoured at the time, made a cockup roughly comparable to that made by the equally admired advisers of the early 30s. In some respects, the Roger-nomics recession was more severe than the Depression – it was certainly longer. The important difference was that in the early 30s the entire world economy was suffering. In the 80s, it flourished while New Zealand stagnated.

This time, the world economy is neither in depression nor in a reasonably balanced expansion. Rather, the US economy is stimulated by a huge and growing fiscal deficit, arising from tax cuts that generate consumption but not as much production or savings. This savings deficit is financed by the Chinese and Japanese. When they switch to safer havens than the US dollar, the world economy is likely to suffer a wrenching blow, although there is little agreement on exactly what will happen.

Although the current difficulties that the New Zealand economy is facing are not entirely of our making, we are exacerbating them. This time, however, the culprit is not the government’s fiscal stance. Today it runs a modest surplus rather than the deficit of the 1980s. (There would be one, had National been elected with its extravagant tax cuts, and simultaneous promises not to cut government spending, although nobody believed them because their lips were moving.)

So this time the nation has a savings deficit from household overspending. Rip would vaguely recall that in the 80s the do-nothings said that since households made optimal decisions (how did they know?), there was no need to worry – even if their effect was to unintentionally wreck the export sector and growth. This government is introducing savings incentives (despite opposition from the do-nothings), but they have yet to impact.

Meanwhile, the Reserve Bank uses high interest rates to discourage household overconsumption and excessive investment in housing. The economy is slowing down – not surprisingly, given that the export sector’s profitably is undermined by the high exchange rate. The popular concern issue is whether the economic expansion is just faltering, or whether there will be a contraction (as occurred in the late 80s). The greater worry is how long it all will last. Will it turn into a prolonged recession? Will New Zealand still be slowing down (or contracting) when the world economy wrenches?

Rip does not know the answers. But he would notice that we are once more fighting the last war, hardly thinking through the new issues that challenge us. He might conclude that although we have learnt a little from our past mistakes, he expects us to make new ones.

What New Zealand’s Economic Transformation Is About

Paper to a breakfast session of New Thinking ‘06 a conference promoting New Zealand’s latest biotech, creative and technological capabilities. Lead sponsor: New Zealand Trade and Enterprise. Auckland 27 February- 2 March, 2006.

Keywords: Growth & Innovation;

David Skilling’s presentation is pessimistic because its message was known twenty and more years ago and little seems to have changed. [1] Then we had poor global connectedness with an overemphasis on resource exports. Twenty years later we still have poor global connectedness with too high a proportion of resource based exports.

I could, in another context, explain how we wasted the two decades, but this morning I am going to talk about what at last we are doing about it. Note there is nothing wrong with primary exports per se, and we expect them to flourish in the future, especially if we get a sensible outcome from the Doha trade liberalisation round. However countries which depend upon resource based exports tend to grow more slowly that those with sophisticated manufactures and service exports where there are greatest dynamism and productivity gains.

Exporting such sophisticated products need not be at the expense of primary production. Were New Zealand in the middle of OECD countries on an export to GDP it would be exporting about 40 percent more. That is another $20 billion of exports a year on the most conservative assumptions. The additional exports cant come from primary sector, because there are resource constrained.

What the NZI report does not capture is the economic transformation that is underway. That’s what this conference is about. Its about developing certain capabilities which already exist into major export industries.

I’ll talk mainly about biotechnology, the theme of the day. New Zealand has a long and proud record in biotechnological innovation. We have a capable, skilled ,and technologically savvy work force, we have world class research laboratories, and we have a strong tradition of private public partnership. But with the molecular revolution, biotechnology is changing and we have to too.

So the industry is going to look different. Some will continue to be an enabler to the primary sector. But much will strike out to sell biotechnological products directly overseas. For us the technological transformation involves producing high value but light products. Auckland International Airport is already our third largest exporter of goods, while broadband is about as high value to lightweight as you can get.

Unlike the old biotech industry the new one will be more located in Auckland. That means ensuring that Auckland is a global city. The current priorities are infrastructure – transport, broadband and energy security – plus the airport and university. But because New Zealand is a small country expect to find contributors in other centres. An Auckland biotech company I’ve worked with gets some of its testing done in Wellington. Dunedin is likely to be a strong biotech centre too..

There are many things which have to be done to maintain the transformation’s momentum. Let me finish by mentioning something that key people in this audience have to contribute. New Zealand does not just need direct investment in the firms in the biotech and other transformational industries. It needs the commercial intelligence that the investors bring with them. We know that many of the ventures are going to fail – that is the nature of this sort of innovative industry. We dont want to waste resources in these failing industries – the trick is moving your quality resources into the most profitable industries. But it is difficult to make good judgements. Investors putting up their funds are helping the selection of successful firms, in that decentralised way which the market does.

So the economic transformation requires investors not just for their funds but for their judgements. Let me say to them, let me say to all of us embarked on this exciting structural transformation, ‘bon voyage’.

[1] Based on the New Zealand Institute report Dancing with the Stars: The International Performance of the New Zealand Economy. (December 2005)

Sovereignty Under Siege: Globalization and New Zealand a Review

Editors: Robert Patman and Chris Rudd. Published by: Critical Security Series, Ashgate Publishing Ltd, Aldershot. England. 258pp. $US99.95/£55.00.

NZIIA, May/June 2006, p.28.
Keywords: Globalisation & Trade;

Much of the public’s anxiety about globalisation is concerned with sovereignty. However its understanding of the previous sentence’s last two nouns is vague and imprecise, for each requires careful definition. Patman and Rudd’s introduction defines sovereignty by tracing back to the 1648 Treaty of Westphalia as ‘a sovereign state … exercises supreme legal unqualified and exclusive control over a designated territory and its population’, claiming that there are ‘close to 200 sovereign states’ (which almost resolves their question, since if they exist what is the problem?). They are less sure of giving a ‘precise meaning to the term globalisation’, broadly defining it as ‘the intensification of interconnections between societies, institutions, cultures and individuals on a worldwide basis’. Note the first definition involves a situation, the second a process, which complicates the coupling of the two.

That aside, the introduction is a useful beginning, although it is not clear that the eleven chapter writers saw it before they wrote their essays. As with many such books the quality of the contributions is uneven, and the argument not consistent. A serious weakness is their insularity, for there is little reference to issues except in a New Zealand context, despite the topic of globalisation crying out for comparative analysis. It is one thing to look at the New Zealand-United States relationship, but surely it needs to be put in the context of the US relationships with a host of other countries.

Part I, Political and Economic engagement, begins with Brian Roper asking whether there has been a decline of national and state autonomy. Roper has his own distinctive (Marxist) approach to New Zealand which begins by contradicting the editors by taking globalisation to be the latest stage of capitalism (as indeed does the London ‘Economist’). So did Lenin 90 years ago. History provides such challenges. Did New Zealand ever have much de facto sovereignty? Have we not always been a colony or neo-colony? Is the golden past when New Zealand was really ‘sovereign’ just a myth? Such questions undermine the pristine definition of ‘sovereignty’ of the introduction.

The remaining three chapters of this Part – Martin Richardson (the economy), Paul Roth (human rights) and Tony Wood (parliament) – provide solid backgrounds, rather than new insights and do not address the issues raised in the previous paragraph.

I skip past the middle Part of four chapters on national identity (by Paul Spoonley, Manuka Henare, Richard Bedford and Janine Hayward) which while academic contributions from a New Zealand perspective do not grapple sufficiently with the pressures globalisation places on culture.

Part III consists of three essays on Security and Foreign Policy Directions, by David McDonald (regionalism), Richard Jackson (multilateralism) and James McCormick (the US relationship). Each is a standard foreign policy essay with some remarks on globalisation added. The first two are upbeat: ‘globalisation has increased New Zealand’s ability to project its influence regionally and internationally’. All the contributors to this book are academics: I suspect those in the foreign service would add that the writers dont realise how bloody hard any projection is. The Doha Round negotiations (barely discussed in this book), for instance, are a test of just how much influence we do or dont have. My impression is ‘almost negligible’ were it not for the quality of our foreign service.

Patman and Rudd’s conclusion argues that the capacity of the New Zealand state to make decisions has not been substantially eroded by globalisation, although the contributors support the notion of that the role of sovereignty is ‘being redefined by the state actors themselves’. Themselves? Little attention is paid to the degree which that redefinition is a response to external pressures. For instance, did New Zealand abandon the Dairy Board because it wanted to, or because it reluctantly judged that in the totality of all the pressures on it, this state monopoly had to be given up?

In order to belong to a globalised world, one has to abandon the practice of much of the sovereignty implicit in the Treaty of Westphalia. That is why it is important to distinguish between de jure sovereignty and de facto sovereignty. A country may still appear to exercise supreme legal unqualified and exclusive control in principle . In practice that control is modified by the actions of other states (the smaller the state, the greater the modification). The reality of statesmanship is how to maximise such control that is left. Regrettably, the book does not really address this issue, central though it is to sovereignty under globalisation.

To finish more lightly. This is an English published book which uses American spelling. At one point the book reports New Zealand’s GDP in 2003 was $85.34 billion, sourced from the CIA World Factbook (which I also use when working on foreign countries). So the figure is not in New Zealand dollars (its about $NZ136 billion) but in foreign prices – the meaning of which I leave you to work out, since the CIA definition is slightly wrong. Such are the incipient impacts of globalis(z)ation on culture and intellect.

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Janice Gill: Artist Of the Narrative and the Marginalised


Keywords: Literature and Culture;

The first paintings I saw by Janice Gill were at an exhibition at the Gallerie Legard on Kelburn’s Upland Road. I was particularly taken by one based on her previous opening. It looked from across the street through the gallery window at the guests sipping wine, talking to one another, but not looking at the paintings. The exception is the gallery director – presumably the much-loved Kay Roberts, for you can only see her back – looking at the wall with Gill’s paintings across them. Someone is walking through the door: a friend says it was John Drawbridge, although Janice tells me she did not have anyone specifically in mind. Anyway, let’s say it is a fellow artist, who is looking at the street in front, where one of the bag ladies – a painting of another is a part of the exhibition – walks along the pavement. She is oblivious to the ‘beautiful people’ inside, they oblivious to her, or to the painting about her.

It’s a Cartier-Bresson moment, where the artist clicks onto a reality that others of us see only in retrospect. Janice and I both lived in Christchurch in the 1970s (although we never met). Janice saw bag ladies and painted in locations familiar to me, such as Cashel Street. I saw them first in her paintings.

Wellingtonians (and perhaps others) go to openings (and book launches) as social occasions. Often you cant see the works because the patrons stand in the way, looking away from the pictures on the walls, networking instead. Sure – some buy, and some regret they cannot. But how many engage with the works on the night? Especially if they are Gill’s, portraying the lives of the bag ladies and their marginalised kin.

Not that the paintings are exact images of the click. (The gallery door was located differently from the way it is shown in the picture.) But the essence of a Gill painting is the narrative – the representation of both a particular reality and a universal verity. That first painting to take my eye is called – appropriately given its self-referential content – ‘Real, Real, Unreal’ (1981) (you work out to whom the labels refer). However – in a frustration with which many artists are familiar – I think of it as ‘Inside and Outside’. Janice is definitely the outsider.

Renaming is not as serious an arrogance as the behaviour of the patron who thinks ownership of a painting confers ownership of the image – copyright law is clear that it remains with the artist, other than in exceptional circumstances. Sometimes the renaming captures an essence which the artists knows anyway. When I call the painting of the bag lady hanging on the Gallerie Legard wall, ‘The Streets of Christchurch’ – its actual title is ‘Going On’ (1980) – I am recalling Ralph McTell’s “Have you seen the old girl/ Who walks the streets of London/ Dirt in her hair and her clothes in rags?/ She’s no time for talking, /She just keeps right on walking/ Carrying her home in two carrier bags.”

Yet while there is passion in Janice’s painting – and sly humour, visual and often verbal including in the titles – rarely is there overt anger. Maybe it is her bright colours. ‘Forty Years On’, with its bag lady walking down a dark narrow lane to age, death and oblivion, is the darkest Gill I know. But let not the careful choice of contrasting colours obscure the sharp lines of the geometrical design, often involving overlapping rectangles. Some paintings are Piet Mondrians with a superimposed narrative.

It’s the narrative with which most observers engage. A “Listener” column, for instance, always has some deep analytic propositions – like the disciplines of a painter – over which is patterned a story to engage the reader. Getting the balance between narrative and analytics is harder than it appears. Well done it seems easy – but it aint. The superficial may read (or see) only the narrative and fail to see the underlying analytics.

But neither should the narrative be ignored. Janice first painted Winton, where she grew up, and surrounding Southland: the buildings, local characters, old machinery, workplaces, recreation, railway and Stewart Island scenes, recreating places and events familiar to the locals but hardly known to New Zealanders living to the north. Two local myths are the repeatedly portrayed: Minnie Dean, Winton celebrity and the only woman legally hanged in New Zealand (for baby murder, in 1895); and illicit whiskey distilling in the nearby Hokonuis. Such themes gave Janice an early reputation as a folk painter.

But her entire oeuvre of the time is the creation of a Southland world of its people and its places. One day a retrospective will have the locals saying ‘this is who we are, this is what we are really like’. Expatriate Trevor Agnew, writing about his desire to return to the South, wants again ‘to see the thirty shades of green that Janice Gill used to paint the Southland landscape’.

At the age of 29, Janice moved north to the Christchurch branch of the stock and station agent for whom she worked, where she met a harsher, less cosy, world. The resulting images are more urban and the marginalised appear more often, together with business men from the other end of the social spectrum.

A short stay there has been followed by a quarter of century in Nelson where again the paintings recreate the locality with buildings, shopping, click moments which capture the nostalgia or the pomposity of a ceremony. And people – bag ladies, the unemployed, solo mothers, workers – paintings of those who would not normally expect to be subject of portraits.

I call her ‘Community Care’ painting (1991), ‘The Lowry Man’, not only for the obvious parallel with his matchstick men, but because Janice has a passion to paint the ordinary people of her community, as they are, with affection and without judgement, just as Lowry did for his Salford. Art critic Richard Dingwall writes ‘her achievement is to have created a remarkable body of work that is entirely distinctive and fully realised within its own terms.’

Over the years she has travelled: click moments in America, in Auckland, in art deco Napier, in Wellington. Some pictures recall her active involvement in the Labour Party – the traditional Labour Party with its commitment to the marginalised. Others satirise the business culture – often accompanied by business logos and mirror glass buildings. Now the business people include women, but they too remain oblivious of the marginalised around them.

Ironically, and sadly, Janice became a beneficiary following an accident while working on a farm. She has had a long battle with the Accident Compensation Corporation for appropriate rehabilitation and work options since the use of her arm is limited. She too has faced the reality of the subordination and humiliation which thousands of beneficiaries experience. The physical injury mean that she paints with less freedom and for fewer hours. All painter’s styles change with time, but in recent years Gill’s work has become smaller, tighter and fewer are painted.

Janice recently revisited her ‘folk artist’ tradition, painting a series on the Burgess Gang – the Maungatapu murderers of 1866 – acquired by the Nelson Provincial Museum – Pupuri Taonga O Te Tai Ao. The series involved new challenges, not just from the physical limitation. ‘Grim Procession’ (2004) – the bringing of the four bodies down the mountain – dispenses with her usual rectangles, its strong diagonals converging on the peaceful Waimea Plains below. The four telephone polls – crosses for the bodies (and homage to McCahon) – also reflect research as meticulous as the painting, for the line had been installed only a couple of months before the murders and was then the new-fangled amenity. The down-sloping winding track is through dark bush – detailed fern and beech forest – her first real landscape, for normally she has been a painter of towns and people.

Gills has provided three book covers. Art and book covers often do not go well together (unless they are art books). McCahon’s landscape “The Promised Land” is a central notion in my ‘The Nationbuilders’ but it took skill by the book’s designer, Katrina Duncan, to get the ‘landscape’ painting comfortably on a ‘portrait’ cover.

It was perhaps inevitable that the cover of Lynley Hood’s biography of Minnie Dean should have a work painted specifically by Janice Gill. She also illustrated my ‘Wages and the Poor’, a book written in 1986 to demonstrate that there was an alternative to Rogernomics– one Labour cabinet minister of the era received three Christmas copies from concerned friends. The cover picture portrayed a poor family in simple surroundings, but still maintaining their dignity.

For ‘The Whimpering of the State: Policy after MMP’, we were getting desperate for a cover. Suddenly Janice’s ‘Lunchtime Wellington: Rogernomics in Progress’ (1989) became obvious. It shows from outside the building site a large hole where the foundations of the Mayfair Centre were being laid. (In the course of its construction, the cost of the building crashed three major corporations.) Behind it are other identifiable Wellington buildings (although not in location). Three suited spectators gaze admiringly at the hole, oblivious to the young punks walking to the left or the bag lady to the right. The picture had to be trimmed slightly on both sides to fit the cover more easily, and the 1987 wall slogan ‘Prebble without a cause’ (a reference to the then minister of State Owned Enterprises with a propensity to sell off everything) had to be removed for a book about the late 1990s.

Our writers have largely avoided the topics that Janice paints (and I write about). One exception is Maurice Gee. His novel Crime Story contrasts the criminality of the underclass with the no more moral activities of financiers. A wife of a financier is walking her dog along ‘Upland Road, past the doctor’s rooms and the reassuringly scruffy seven-day dairy. The gallery – another station on her dutiful way – came next, with new paintings in place, ugly and bright. Deliberately ugly? There was a lot of that about, and now and then she saw the point. Deliberately beautiful never had anything to say, or even show, when you got down to it. She did not tie the dog up and go in, had not sufficient strength of mind for glum women with shopping bags and jowly Roundtablers – were they? – even in paint. She did not want to know about hunger and poverty, either of the body or the mind, not just now. There were times for being angry and times for fear, and the air was fresh this afternoon, the wind lifting the petrol fumes into the upper air. She did not want her easiness disturbed.’

Janice Gill uses her painterly craft to disturb our easiness.

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Alcohol – Socioeconomic Impacts (including Externalities)

Draft for “The International Encyclopedia of Public Health” (2008) vol.1 pp.112-116.

Keywords: Health; Regulation & Taxation;

Depending on the cultural context and particular circumstances, the same drink of alcohol can generate a feeling of benign prosperity, or moroseness, or stupor. The immediate health benefits for the individual may also be benign (or even beneficial), or the drink may result in injury or death – in the short run from accident or in the long run from one of the diseases alcohol can precipitate. The consequences for others may also be benign or beneficial, or damaging or mortal from violence or collateral accident. Someone may be born as the result of intentional or unintentional impregnation. The loss of production due to poorer workplace productivity or non-attendance from drinking alcohol may cause financial loss to the drinker and possibly to others. Among the many sectors of the economy alcohol may, or may not, especially generate additional costs in the criminal system, in the health system, and in the transport system. The national budget probably gains from the specific tax it levies on alcoholic beverages, but these levies may, or may not, cover its costs from the consumption of alcohol.

The impact of alcohol consumption is so multifarious that it is not easy to track all its social and economic impacts. This review confines itself to the ones which ‘social costs of alcohol misuse’ studies have paid most attention to, excluding the burden of disease caused by alcohol which is covered in this volume by Rehm. The framework used is that of the WHO report International Guidelines for Estimating the Costs of Substance Abuse, and related and subsequent studies although some of the technical issues such as the valuation of life, counterfactual hypotheses, and discounting are not considered here,

As the opening sentence reminds us, the social and economic impact of alcohol is affected by the cultural context, even though the physiological impact may not be. This means that each country, or culture within a country, has its own quantitative and qualitative particularities. This entry deals with the heterogeneity by its bibliography including recent country specific studies (especially cost studies, because they look at most dimensions of the impact).

Following brief discussions on externalities and irrationality, the main areas of impact are dealt with in alphabetical order, because their relative significance will vary from country to country.

Externalities

The social cost of an activity is the total of all the costs associated with it, including both the costs borne by the economic agent involved and also all costs borne by society at large. This includes the costs reflected in the organisation’s charge (price) which covers the use of the various resources (including labour capital and risk as well as natural resources) excluding taxation, together with the costs external to the firm’s private costs. If social costs are greater than private costs – the costs of purchase – then a negative externality is present.

When the market economy is working effectively, and there are no external social costs, rational consumer will only purchase and consume the product if it is more valuable to them than the price paid for it. In this case society is better off since the consumers deem themselves better off from the transaction, and society is no worse off since it has traded off the social costs of the consumption for the payment which embodies the ability to purchase other products with equivalent social costs.

There are all sorts of subtle assumptions embodied in this analysis: public health analysis often worries about the equity in the distribution of income – the power to purchase. But even if those assumptions hold (near enough), alcoholic beverages are one of a number of products for which the purchase price cannot generally equal social costs because the social cost of each unit of consumption varies greatly. Thus the social cost of the first drink in a session may reflect the private cost, but later drinks may generate additional social costs in poor health, material damage, public and private outlays which were ignored when the drinking decision was made, violence to others, and even death to the drinker or, in the case of motor vehicle accidents and the like, to innocent bystanders.

As a later section discusses, taxation and other public policy measures aim to reconcile in one way or another the inconsistency between the purchase price and social costs. However there is still likely to be a substantial difference for at least a number of significant ingestions.

A useful term is ‘misuse’ for where the consumption generates outcomes which were unintended by the consumer and not taken into account when the purchase/drinking decision was made. It is sometimes preferred to ‘abuse’ in order to emphasise, that much alcohol consumption is useful, in the sense of its social impact is benign or even (mildly) beneficial.

Irrationality

The previous discussion has assumed that consumers are acting rationally, taking into consideration all the costs of the consumption which affect them (although they may discount costs in the more distant future).

However, it is not immediately obvious that ‘rationality’ applies when there is drunkenness or addiction. Economists explore this use a theoretical definition of irrationality where consumers show time inconsistency between decisions, as when they go into a bar to have three drinks, change their minds as a result of the resulting euphoria and drink more, and the following day regret the change of mind. Ainslie (1992) Frederick, Loewenstein, and O’Donoghue (2002) O’Donoghue and Rabin (2003).

It is unclear how to define externalities in such circumstances. The tendency has been to ignore such irrationality, but increasingly cost of alcohol studies need to address it, incorporating it in a rigorous way consistent with the theory.

Crime

Pernanem et al (2000, 2002), based on Goldstein (1985), proposes four models (‘modes’ might be a better word) to account for alcohol associated crime.

1. The pharmacological model in which intoxication encourages the commission of crimes which otherwise would not have been committed.
2. The economic means model in which crimes are committed to fund alcohol consumption.
3. The systemic model involving the illegal economy, as in unlawful brewing or distilling or sale of liquor.
4. The substance-defined model, where actions are defined as being criminal by laws which regulate drug use, such as drunkenness in a public place, supplying underage or drunk people (if that be illegal) and drink-driving.

Note these apply also to illicit drugs, where that modes 3 and 4 are more important than to alcohol.

This crime causes social costs, both directly via damage to property and individuals but also with consequent costs to the public purse for policing, justice and corrections, transport management and indirectly when it adds to concerns about community safety and security.

Estimating the attributable fractions (the proportions which alcohol causes) for criminal activity is much less advanced than for disease. Because law, practices of enforcement and culture vary by country, fractions cannot be easily borrowed from other jurisdictions. (Indeed care is also required in generalising research findings on the relationship between crime and alcohol.)

Diseases (Drinkers)

Rehm (2006), this volume, describes the impact of the consumption of alcohol on the health of the consumer.

As well as affecting the health of its drinkers, alcohol can affect the health of others. These include:
1. Children born as the result of an unplanned conception as a result of intoxication. (It is not obvious how to deal with this.);
2. Those suffering Foetal Alcohol Syndrome and Foetal Alcohol Effects, said to be the major source of mental illness and behavioural disorders, and generating on average a large public cost during their life time; Harwood (2000)
3. Those close to the drinker who may experience pain and suffering, abuse, violence, injury and death;
4. The public at large who may experience pain and suffering, violence and death including from motor vehicle accidents.

There are rarely good estimates of these phenomena, and the incidence and costs vary from country to country.

Motor Vehicle Accidents

As well as injury and death from motor vehicle accidents caused by alcohol consumption there is damage to the cars and property, the costs of law enforcement and prevention (which may include road design), and the costs of administrating the insurance system. (There are also costs in the resulting travel delays).

Motor vehicle accidents are particularly onerous, but there are other accidents. Industrial accidents caused by alcohol are usually covered in the next section.

Production Losses

Drinking alcohol may result in production losses from the
1. Reduced workforce size as a consequence of death or premature retirement;
2. Absenteeism from sickness or injury;
3. Reduced on-the-job productivity from sickness or injury and accidents.

Alcohol misuse may also cause loss of production in the unpaid household sector and in other non-market activities. Although the informal economy is not included in the standard measures of market output (such as GDP or GNP) the losses or production in it due to alcohol misuse may be significant.

Public Spending

Most of the above events described above, to some extent impact on public spending (or, for those countries which depend more upon private provision, on the private insurance system). Such an impact is a classic externality, because it is unlikely to be taken into account by the drinker.

Among the most significant sectors affected by additional spending are costs to the health system (at every level from prevention to advanced tertiary specialities, but also for nursing care later in life). social security or other forms of public income maintenance, traffic management, and also to policing, justice and corrections.

Taxation and Public Policy

Historically, specific taxes on alcohol were imposed because they could be readily collected at brewery, distillery or port. (There are greater difficulties collecting excise from small vineyards.) Later in some, but not all, jurisdictions the justification for special duties shifted from convenience to a notion of the propriety of taxing ‘sinful’ activities.

More recently, in some jurisdictions, alcohol taxes have been justified by the arguments that raising the cost of alcohol better reconciles the private cost and social cost of alcohol consumption. If so, the pure logic might conclude that the level of taxation should be related to the quantity of absolute alcohol rather than the value of the drink, imposing more heavily on low value drinks. An extension would be to focus on the minimum cost of alcohol, structuring the excise to maintain a minimum cost of absolute alcohol, where some of the worse social costs occur. Easton (2002).

However no country has an economically rational alcohol taxation regime, and revenue considerations still remain important in its design as well as political and cultural considerations.

Moreover, as previously mentioned, the divergence between private and social cost varies from drink to drink, so a taxation regime cannot be perfect. Thus other public policy measures have to be implemented. See 355 Effective Alcohol Policy and 366 Integrated Alcohol Control, this volume.

Insofar as such policy measures are effective, there would be a reduction in the divergence between private and social cost, and the optimal excise duty is lower than if the policies are ineffective.

Conclusion

The impacts of alcohol consumption are manifold, and it is not practical to list them all. The ones discussed here are generally those which are known to be largest in quantifiable terms, as measured by their impact on GDP (or GNP) the standard measure of the aggregate output produced in the formal economy (generally valued at market prices). It asks what of the available production had to be diverted to deal with the costs of alcohol misuse. (Technically it is an estimate based on supposing that alcohol misuse had not occurred, what additional resources would have been available for consumption and other purposes.)

The table below provides estimates for a couple of countries of this (tangible) ‘social cost of alcohol’, as a proportion of GDP. The estimates come from studies which broadly conform to the International Guidelines. Single et al, 2002. They do not include estimates of the intangible costs, arising from death injury and poor quality life which alcohol misuse generates (avoiding, among other things, the problem of valuing of life). Nor do they include the impact on the informal economy, because there is no measure of the aggregate value of its output (the equivalent of GDP).

The (Tangible) Social Costs of Alcohol as a proportion of GDP

Country Australia Canada
Year 1998-9 1992
Costs of Crime, Law and Order .42% .20%
Health Care Costs .03% .19%
Loss of Production .23% .60%
Motor Vehicle Accidents .24% 0.7%
Other Government Resource Costs included elsewhere 0.3%
TOTAL .92% 1.09%
Source Collins and Lapsley 2002 Single et al 1998

In each case the costs are estimated to be near 1 percent of GDP, the implication being that without alcohol misuse effective GDP would be 1 percent greater. However the increase in GDP per capita would be lower, depending on the mortality impact on the population.

Note that despite using the same international guidelines, there are considerable differences between the subtotals, only some of which may be explained by classification differences or by the different cultures and institutional arrangements of Australia and Canada..

Nevertheless, while other countries may have different social costs of alcohol misuse, representing the waste from drinkers not taking into consideration the social consequences of their decisions, the magnitude as a proportion of total output is likely to be significant. The quantification reinforces the common sense conclusion of a need for behaviour change and public policies in regard to alcohol consumption in order to reduce its misuse.

Bibliography
Ainslie, G. (1992) Picoeconomics, Cambridge: Cambridge University Press.
Andlin-Sobocki P. and Rehm J. (2005), “Cost of addiction in Europe”, European Journal of Neurology, 12(s1): 28-33.
Babor, T. Caetano, R. Casswell, S. Edwards, G. Giesbrecht, N. Graham, K. Grube, J. Gruenewald, P. Hill, L. Holder, H. Homel, R. Österberg, E. Rehm, J. Room, R. and Rossow, I. (2003), Alcohol: no ordinary commodity. Research and public policy, Oxford and London; Oxford University Press.
Collins, D.J. and Lapsley, H.M. (2002), Counting the cost: estimates of the social costs of drug abuse in Australia in 1998-9, Canberra, National Drug Strategy Monograph Series No. 49,
Collins, D. Lapsley, H. Brochu, S. Easton, B. Perez-Gomez. A. Rehm, J. Single, E. (2006) International Guidelines for the Estimation of the Avoidable Costs of Substance Abuse, Ottawa, Canadian Centre on Substance Abuse.
Easton, B. (1997), The Social Costs of Tobacco Use and Alcohol Misuse, Public Health Monograph No. 2, Department of Public Health, Wellington School of Medicine.
Easton, B. (2002) Taxing Harm: Modernising Alcohol Excise Duties, Wellington, Alcohol Advisory Council of New Zealand,
Elster, J. (ed) (1999) Addiction: Entries and Exits, New York: Russell Sage Foundation.
Frederick, S. Loewenstein, G. and O’Donoghue, T. (2002) Time discounting and time preference: A critical review, Journal of Economic Literature Vol. XL June 2002: 351–401.
Gmel, G, Rehm, J. Room, R. and Greenfield, T. (2000) Dimensions of alcohol-related social and health consequences in survey research, Journal of Substance Abuse 12:113-138.
Goldstein, P.J. (1985). The drugs/violence nexus: A tripartite conceptual framework, Journal of Drug Issues, 14, 493-506.
Harwood, H. (2000). Updating estimates of the economic costs of alcohol abuse in the United
States: Estimates, update methods, and data
, Report prepared by the Lewin Group for the National Institutes on Alcohol Abuse and Alcoholism, Washington.
Haworth, A. And Simpson, R. (2004) Moonshine Markets, New York and Hove: Brunner Routledge.
Heather, N. Peters, T. and Stockwell, T. (eds.) (2001) International Handbook of Alcohol Dependence and Problems, Chichester: John Wiley & Sons.
Huakau, J. Asiasiga, L. Ford, M. Pledger, M., Casswell, S. Suaalii-Sauni, T. and Lima, I. (2005) New Zealand Pacific peoples’ drinking style: too much or nothing at all? New Zealand Medical Journal 118:1491-.
Klingemann, H. and Gmel, G. (eds.) (2001) Mapping the Social Consequences of Alcohol Consumption, Dordrecht: Kluwer Academic Publishers.
Mathers, C. Bernard, C. Iburg, K. Inoue, M. Fat, D. Shibuya, K. Stein, C.; Tomijima, N. and Xu, H. (2003) Global Burden of Disease in 2002: data sources, methods and results, Global Programme on Evidence for Health Policy Discussion Paper No.54, Geneva, World Health Organization,
O’Donoghue, T, and Rabin, M. (2003) Studying Optimal Paternalism, Illustrated with a Model of Sin Taxes, American Economic Review Papers and Proceedings 93(2), May 2003: 186-191.
Pernanen, K. Brochu, S. Cousineau, M.-M. Cournoyer, L.G. and Fu Sun (2000), Attributable fractions for alcohol and illicit drugs in relation to crime in Canada: conceptualization, methods and internal consistency of estimates, Bulletin on Narcotics, Volume LII, Nos. 1 and 2, United Nations Drug Control Programme.
Pernanen, K. Cousineau, M-M. Brochu, S. and Fu Sun (2002), Proportions of Crimes Associated with Alcohol and Other Drugs in Canada, Ottawa, Canadian Centre on Substance Abuse, www.ccsa.ca/docs/crime2002.pdf.
Österberg, E. and Karlsson, T. (eds) (2002) Alcohol Policies in EU Member States and Norway: A Collection of Country Reports, Helsinki, STAKES.
Rehm, J. (200?) The Burden of Disease Caused By Alcohol,” This volume.
Rice, D. Kelman, S. Miller, L. Dunmeyer, S. (1990) The Economic Cost of Alcohol and Drug Abuse and Mental Illness, 1985, DHHS Publication No. ADM90-1694, San Francisco: Institute for Health and Ageing, University of California.
Room, R. Babor, T. and Rehm, J. (2005), “Alcohol and public health”, Lancet, 365(9458): 519-30.
Single, E. and Easton, B. (2001), Estimating the economic costs of alcohol misuse: why we should do it even though we shouldn’t pay too much attention to the bottom line results, paper presented at the annual meeting of the Kettil Bruun society for Social and Epidemiological research on Alcohol, Toronto, May.
Single, E. Collins, D. Easton, B. Harwood, H. Lapsley, H. Kopp, P. and Wilson, E. (2003), International Guidelines for Estimating the Costs of Substance Abuse-Second Edition, Geneva, World Health Organisation.
Single, E. Robson, L. Xie, X. Rehm, J. (1998) The economic costs of alcohol, tobacco and illicit drugs in Canada, 1992, Addiction 93:7: 983-998.
Skog, O.J. (1985), The collectivity of drinking cultures: a theory of the distribution of alcohol consumption, British Journal of Addiction, 80(1): 83-99.
To be added.
355 Effective Alcohol Policy, this volume.
366 Integrated Alcohol Control, this volume,

Acknowledgements
Serge Brochu, David Collins, Mike MacAvoy, and Pierre Kopp all commented on an early draft of this entry.

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Ethnicity and the Census: Statistics New Zealand Asks ”’whaddarya?”

Listener: 25 February, 2006

Keywords: Literature and Culture; Maori; Statistics;

March 7 is Census Day, the day on which Statistics New Zealand (like Foreskin) asks “Whaddarya?” The Census may not cover all the questions you think important, but a good quality Census response makes the surveys that ask such questions cheaper and you are surveyed less often.

Most Census questions are straightforward. However, the ethnicity response is complicated. It is an important “whaddarya?” The 2006 Census is asking exactly the same question as in 2001. Its notes give no guidance. You respond as you feel. It need not be a race-based response. We know there are people of part-Maori descent who say they are not of Maori ethnicity. And there are those who say they are of Maori ethnicity but have no Maori ancestors.

I shall write: “Pakeha.” Asked whaddarya? when I am overseas, I say “New Zealander”. But at home I provide a finer distinction, because I respect the 30% who say they are “Chinese”, “Maori”, “Samoan” or so on, as well as being New Zealanders. I am comfortable with “Pakeha”, which Henry Williams used for the translation of “European” in the Treaty of Waitangi. A missionary using “Pakeha” in an official document shows it is a dignified word.

Ethnicity is such a nuanced notion that the Census allows us to record multiple options, publishing detailed tables so we can trace how groups respond. But for public purposes we need a summary.

Until recently, the practice was “prioritisation”. All those who ticked “Maori” were classified as of Maori ethnicity, even if they ticked other categories as well. Pasifika peoples were similarly counted (unless they were already in the Maori classification), and so on. The proportion of (ethnic) Maori in the 2001 Census Population was reported as 14.7%. But 44% of them said they were something else as well. This group is particularly prone to multiple ticks. Only 8% of the whole population gives more than one ethnicity. Those who ticked “Maori only” came to but 8.2%. (See table.)

Such prioritisation is insulting to those who ticked Maori and something else: they clearly did not want to be classified only as Maori. It is also insulting to those who only ticked Maori, since it is diluting their ethnic commitment.

Worse still, it has distorted public discussion. Sure, there are about 15% who think they are whole or part Maori ethnicity. But often the relevant proportion is the 8.2% who think themselves as sole Maori. (That better explains the number of Maori electoral seats, for instance.) It’s a case of Gilling’s law. The statistician’s technical prioritisation rule has changed the way the nation thinks about its ethnic relations.

Realising this, Statistics New Zealand now simply records everyone by all the ethnicities they report. That means, unfortunately, that the total of people’s ethnicities exceeds the total number of people, since multiple tickers get counted more than once. If you know what you are doing, it does not matter, but, in a recent report, I had to laboriously explain this complication.

There is a simpler solution. Suppose we record a new ethnicity, “Maori-Pakeha”, which is all those who tick both categories. We are not inventing it. You already did that when you designated yourself that way.

The shares of the population by large ethnic categories in 2001 were sole New Zealand European 72.8%, sole Maori 8.2%, sole Asian 6%, sole Maori-Pakeha 5.4%, sole Pasifika 4.6%, sole Other (eg, African) .5%, with only 2.5% of the population reporting they belong to two or more of these categories.

But this is statisticians resolving technical problems. What is really important is that over 5% of New Zealanders say they belong to an ethnicity that has components of both Maori and Pakeha. They are entitled to be recognised in the statistics and in public policy, and to be celebrated as part of the exciting ethnic diversity that is evolving in New Zealand.

Whaddarya According to the Census

  Only Multiple ’Priority’
European 72.8 80.1 72.8
Maori 8.2 14.7 14.7
Asian 6.0 6.6 6.3
Maori-Pakeha 5.4 n.a. n.a.
Pacific Islander 4.6 6.5 5.6
Other 0.5 0.7 0.6
More-than-one 2.5 n.a. n.a.

n.a. = not applicable.

Our Treaty: What Can the Treaty Of Waitangi Mean Today?

Listener: 11 February, 2006.

Keywords: Maori; Political Economy & History

I was appalled by the proposal that the government should ban the teaching of the Treaty of Waitangi. Repressing bits of disapproved history is the practice of despotic regimes, not of liberal democracies.

Although the Treaty may be divisive today, hiding from the dissension will not resolve it. History, if we teach it, reminds us that although 19th-century Europeans ignored the Treaty, discussion continued on the marae. Today we are confronted with the breaches that occurred during the years of neglect.

How are we thinking about the Treaty? It evolves, just as it has in the past. Its Third Article extends the rights and privileges of British subjects to Maori. In 1840, women did not have the vote. It would be plain stupid to stop Maori women voting on this basis.

Eminent jurist Ronald Dworkin likens the evolution of law to each generation adding chapters to a novel. They can write what they like, providing they do not contradict what is in earlier chapters. Similarly, we can update how we apply the Treaty, providing it is consistent with the past.

Article Three does not present a problem. It is easy to extend it to all the rights that apply today, be they “British” or international law or whatever.

Nor is Article One a problem. The government of the country was ceded to Queen Victoria and her successors. Not only does that establish a basis for government in New Zealand, but also it allows considerable freedom as to what it may be, providing it develops in a proper way from an earlier regime (just as a story does). Under the First Article provisions of the Treaty, New Zealand can become a republic, should we want, if it occurs as a part of constitutional evolution.

It is the Second Article – about ranga-tiratanga or property rights – that causes the division. The public debate, from most sides, implies that Article Two applies exclusively to Maori. That is literally true, but it does not make the article racist. The article says that Maori and their successors have certain rights. So, too, do individuals and families. If the government breaches them, as when it unjustly seizes anyone’s family property, there is a grievance for generations to come until it is remedied. That is what the Waitangi Tribunal process is about.

But the Second Article need not, as some liberals seem to feel, just create an obligation to be nice to Maori. Without undermining the specific 1840 intent, the article can be extended to include everyone. For if it is saying that, in 1840, the government should not unjustly seize Maori property, it must also be saying that the government should not unjustly seize anyone else’s private property, either. Not to thus extend it would be racist.

The principle is not peculiar to the Treaty. MP Shane Jones recently reminded us that the Magna Carta (aka “Te Tiriti o Runymede”) says, “If we [ie, King John] have deprived or dispossessed any Welshmen of lands, liberties, or anything else in England or in Wales, without the lawful judgment of their equals, these are at once to be returned to them …” Whichever version, the principle of the integrity of private property rights makes good sense. The stability that it gives is a cornerstone of economic progress. Our European forebears regrettably often ignored the principle when it came to Maori property. Remedying the mistakes of the past is not only correcting the injustices, but reaffirming the integrity of private property.

Some Maori argue that the “rangatira-tanga” of the Second Article refers to the wider notion of autonomy (of which property rights are only a part). I do not always agree with their proposals for its implementation, but the principle that private organisations (and individuals) have the maximum practical independence from the state is called “subsidiarity” by European theorists. The iwi are such organisations: so is the local bowling club. From this perspective, the Second Article is about decentralisation: again a central principle of a liberal democracy.

We can elaborate the Treaty so that every article applies to all of us, and underpins a liberal democracy. Better that than the censorship of the authoritarian state.

Globalisation (index)

Some Key Papers
The Economics of Globalisation: An Introduction (June 2005)

Some Things We Know About Economic Globalisation (February 2005)
The Globalisation of Nations: Distance Looks Our Way (Plan of A Book)

Summaries of my Main Research Development (Because there is some repetition, the first is the most recent)
Globalisation and the Public Health (May 2005)

Marsden Project Pvt 301: New Zealand in A Globalising World (March 2005 Report) (March 2005)
The Globalisation of Time (March 2005)
Leadership and Nationbuilding (February 2005)
Globalisation and Economic Sovereignty (October 2004)

Abstracts of Three Proposed Papers on Institutions and Globalisation
(September 2004)
Competitive Advantage (Transforming New Zealand)
Exporting and Growth (Transforming New Zealand)
From Feudal Society to Globalized Economic Power (Fulbright lecture: August 2004)
The Marsden ‘Globalisation and New Zealand’ Project (Hamilton Presentation) (July 2004)

The Marsden Globalisation Project (Revised, March 2004)
Towards An Analytic Framework for Globalisation (September 2002, Revised January 2004)
The Marsden Globalisation Project (December 2003)

A Research Proposal: Globalisation (May 2003)
Iraq, Oil and the US Dollar (April 2003)
Abstract of Globalisation Research Proposal for Marsden Fund Application, 2003. (February 2003)
Economic Globalisation and National Sovereignty (II) (January 2003)

Different Kinds of Countries and Cities: The Distances Between Them (December 2002)
Globalisation and the Labour Market (November 2002)
Tractatus Developmentalis Economica (October 2002)
New Zealand in A Globalised World (October 2002)

Towards An Analytic Framework for Studying Globalisation (June 2002)
Globalisation: The Consequences in the Reductions in the Cost of Distance (July 2001)
Economic Globalisation and National Sovereignty (August 1999)

Internationalisation and Stagnation: Ch 9 of Globalization and a Welfare State (December 1997)
Globalization and a Welfare State (December 1997)
Globalisation and Local Cultures: An Economist’s Perspective (June 1997)
The External Impact on the Family Firm (March 1996)

New Zealand Centre for Globalisation Stuides
Notes towards the New Zealand Centre for Globalisation Studies (December 2003)
The New Zealand Centre for Globalisation Studies (September 2003)

Book Reviews
Globalization in Historical Perspective (December 2004)
In Defence of Globalization (December 2004)
Globalisation and Its Discontents (August 2003)

At the Crossroads: Three Essays by Jane Kelsey (June 2002)
Reviews of Two Books on Labour Skills and Social Progress(April 2002)
Mind Your I’s and Q’s (February 2002)
APEC in Focus by S. McMillan, B. Ramasamy & F. Holmes (October 1999)

Regional Impact
Globalisation and Little Old Nelson (April 2005)
Canterbury and Globalisation (March 2002)
Low Politics: Local Government and Globalisation (October 2001)

Auckland in A Globalised World (September 2001)

Listener Articles
Doha Dealing: Trade Talks, Not Tax Cuts, Will Decide Our Economic Future (July 2005)
Fa’a Samoa: is the Future of Samoa in New Zealand? (October 2004)
Choose A Scenario: How Are We Going to Respond to the Doha Round Gains? (September 2004)

Sugarcoating (August 2004)
Offshore Debate: Who is Better Off; Who Worse Off? (June 2004)
The Common Agricultural Touch: the American Parliament in Action(June 2004)
Your Friends and Neighbours (March 2004)
A Blooming Future: Are We up to a Good Flower Show? (January 2004)

Competitive Edges: What the New Wave of Trade Theory Can Teach New Zealand (November 2003)
We Are the World: The Time Has Come to Get Serious About Globalisation (October 2003)

Big Bad World: Is There any Future for an Independent New Zealand? (October 2003)
Disorder Afterwards (April 2003)

After Uncle Sam (March 2003)

Terrorism and the WTO: the Importance of the Rule of Law
(February 2002)
The G Word: the Benefit of International Economic Intercourse (February 2001)
Global Warnings (June 2000)

Free v Fair (April 2000)
Global Warning: What would have Bruce Jesson have said about APEC (September 1999)
Rethinking Economic Policy: The Washington Consensus Had Turned to Custard (July 1999)
The Soros Manifesto (January 1999)
Globalization and a Welfare State (November 1998)

The Globalisation of Rugby (April 1998)
All for One: Robert Reich’s Recipe Living in a Globalized World (July 1998)
Callovers, Chalkies & Chips (April 1997)

In Dire Straights (October 1996)

 

Enron and the Law

Regardless of whether the executive committed felonies, the company broke fundamental laws.

Listener: 28 January, 2006.

Keywords: Business & Finance;

I don’t know whether Ken Lay and Jeffrey Skilling, top executives of Enron, the giant US energy company that crashed in 2001, will be found guilty of the various felonies for which they are about to be tried. That is a question of what they did, and the intricacies of any statute law that they may have broken.

I do know that Enron’s crash was the consequence of its abuse of more fundamental laws. Investors score a corporation’s performance by the rise in its share price. That shapes the way the business is run. The theory that justifies the share price as the relevant indicator is based on the assumption that the collective decisions of market investors are the best way to assess a company’s commercial value. The theory does not say the share price is correct – just that it is the best measure readily available. Nor does it allow for corporations manipulating their share price by distorting the information they make available to the market.

The most important information is in the published accounts. Enron’s manipulations were numerous, but a key one was “mark-to-market” valuation of assets in its balance sheet. During the 1970s the New Zealand Government balance sheet had fixed interest loans that became less valuable when interest rates rose, since they returned a lower interest rate. Yet they remained valued there at the amount they were initially advanced. When the government sold them off, it took a capital loss. Nowadays such loans are “mark-to-market”, that is, valued at the price of a willing market buyer. Expect a big hit to the government accounts when the interest-free student loans are revalued.

New Zealand’s past practices reflected accounting conservatism: Enron’s aggressive accounting aimed to boost the share price. So what was it to do when there was no market for the asset? It had energy contracts that went on for 10 and more years. Since there was no willing buyer of the future income flow, they made the value up.

One catch with this mark-to-market strategy is that having made a big profit from a contract in one year, the business needs a bigger contract for the next year in order to inflate its profit line further to justify a higher share price. Enron added increasingly dubious projects, including one based on weather forecasting whose future profits were but optimistic conjectures that never happened.

But even had the forecasts been accurate, Enron’s reported book profits did not generate the cash flow for other investments and dividends. So it turned to “Special Purpose Entities”, which enabled it to obtain cash from financial institutions. Such SPEs are not legal in New Zealand, so they need not detain us. The way Enron did them, they were not legal in the US, either. Andrew Fastow, Enron’s chief financial officer (and chief prosecution witness), has been jailed for 10 years. (Lay and Skilling say it is all his fault.)

The institutional investors in the SPEs knew they were doubtful, so they took additional security in Enron shares. When the skyhooks fell out of the sky, the SPEs and the company crashed. So did its auditors, Arthur Anderson, and its sharebroker Merrill Lynch has had four executives jailed. It also repaid a large sum, as have a number of other financial businesses. But those who really suffered were investors, workers and retirees. The impression is that the financial sector was not acting in their interests, but conniving to rip them off.

For no matter how good a corporation’s accounts look – whether they are fiddled or true – without sufficient cash flow it will crash in the end. Whether its executives end up in the courts or jail is a matter of statute law and judicial process. The corporate collapse is the result of a higher, more demanding, law of cash flow underpinning commercial reality.

(Among the references I used for this column was The Smartest Guys in the Room, by Bethany McLean and Peter Elkind. The film is based on the book.)

Janice Gill: Painter (index)

Keywords: Literature and Culture;

Challenges to the Comfortable

Janice Gill: The Narrative of the Marginalised

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The following review was written by Richard Dingwall in 2004, but not published. It is reprinted with his permission.

One of Janice Gill’s recent commission was to paint the hand of God in a rosy glow, and to repaint Jacob’s ladder, and to add four symbols to an existing panel in the local Masonic Hall S a chalice, an anchor, a cross and an alms bowl. She was originally also asked to paint over a pair of angels but it was decided to leave these where the original artist had put them. After all, it was explained to her, although they had no specific symbolic meaning for the Masons, angels are all around us.

This commission to repaint the panel at a local lodge came via the doyen of Nelson painters Jane Evans who was originally offered the commission but declined, suggesting Gill as a substitute. That Gill accepted is a testimony not only to her status as hard-up artist but also to an affinity that she feels with the untutored hand of the original panel painter.

In 1969, as a nineteen-year-old in Winton keen to paint a scene of local interest, Janice Gill exhibited a painting based on the story of Minnie Dean, the notorious baby farmer who was hanged for the murder of one of her charges. Her painting showed Dean descending from the train at Winton railway station, clutching an ill-starred infant. The work caused controversy at the local Art Society. The death and secret burial of society’s unwanted children was an event that both horrified and fascinated Southlanders, but it was still only ever discussed in hushed whispers, and was obviously not the proper subject for a painting. This was the first of a dozen or so paintings on this theme including a commissioned work for the cover of Lynley Hood’s book on Minnie Dean

There was another sense in which this first painting offended against artistic decorum. Not only did the railway lines, in the artist’s own words, climb all over the surface, but she seemed not to care.

Gill moved to Invercargill where she attended night classes with the artist Jim Gilmore who is an enthusiast for so-called naive art. He showed her reproductions of Grandma Moses (Ann Mary Robertson) and Henri Rousseau (Le Douanier). In these works she discovered the principles that have governed her art ever since : she would have no formal training, and what she painted would mostly be drawn from everyday life. For example, in a group composition painted in the year 2000 of a Nelson market (she has lived in Nelson for almost twenty years) one customer carries a newspaper on which the headline “Crisis in Fiji” can be clearly read, while in the background a caravan sports a banner for local National MP, Nick Smith.

The power of this insistence on the contingent can be fully measured looking at some of her early paintings. In the series Waiting for the Southerner there is much local detail. In the waiting room a New Zealand Railways (remember them?) official enters with her function emblazoned on the breast of her blue uniform. She is a hostess. Youngsters play guitars and sing while a matron drinks tea from a flask. These details evoke an earlier time with surprising potency. They have as much immediacy as those thick rimmed white tea cups that turn up in second hand shops, and because the artist’s interest is with actual events, the images are largely free of sentimentality. The woman in the blue uniform may have the title of hostess but she is not exactly welcoming.

Like Le Douanier Rousseau, Gill has arrived at a style that is distinctively her own. She makes light of her shortcomings as a representational painter, even making a virtue of them. Recently she has used masking tape to make her buildings sharper, giving her figures, painted freehand, a contrasting softness. Her men and women are either in profile or face on, and over the years she has devised a distinctive five tone modeling technique to give solidity to their bodies. The effect may appear toy-like, but this is a sophisticated and highly-developed system for displaying ordinary life and, because it allows her to describe what she sees without the art getting in the way, it is far superior, for her purposes, to the realistic rendering of figures.

Gill’s proud claim to be untutored should not be mistaken for ignorance or innocence. Early portraits of tradesmen working in her native Winton show the printer of the local newspaper and the shoemaker in their workshops and are in a venerable tradition of craft portraits. One thinks of the Zoffany portrait of the optician John Cuff that was part of the selection of the Queen’s pictures that toured New Zealand in 1994. Furthermore, Gill’s paintings often contain social commentary. Many of her works rail against financial institutions and those who grow rich through them, contrasting their uncaring affluence with the plight of ordinary people. One satire features a terrifying bag lady walking despondently past the glass window of a dealer gallery where invited guests at an opening are sipping wine and talking. So preoccupied are they with themselves that they stand with their backs to the art on the walls. They are equally blind to the poverty in the wider world around them.

The bag lady represents the outsider, a frequent figure in Gill’s group paintings. A child stares balefully at the viewer amid the crowds outside the Winton pub. A man at the back catches our eyes amid the bustle of the station. These are disturbing figures, momentarily detached from the flow of everyday life, yet they animate the scenes they inhabit by catching our attention and challenging our right to spy on these lives. Gill clearly sees herself as something of a misfit, an artist who has ignored the flow of contemporary practice. There is some truth in this. Her achievement is to have created a remarkable body of work that is entirely distinctive and fully realized within its own terms.

There is an increased urgency about her hopes for wider recognition. It seems the damage to her arm limits the time she can spend painting each day. Sadly, Autumn Market, a painting that took nine months to complete, may be her last large scale painting. It would be nice if one of those angels that are apparently all around us, maybe the one that according to legend helped St Matthew write the first gospel, could, as he did with the saint guide her arm, and help her keep painting these fascinating records of our everyday life.

Richard Dingwall (1984)

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Hard Grind Ahead

Poor economic performance is the consequence of poor economic thinking

Listener 14 January, 2006.

Keywords: Growth & Innovation;

I am even gloomier than the latest report from the New Zealand Institute (NZI), Dancing with the Stars: The International Performance of the New Zealand Economy. Its sobering conclusion is that, compared to the economies we desire to emulate, our global connectedness is near the bottom.

Despite our knowing all this 20 years ago, things have got no better. Admittedly then we did not think much about outward foreign direct investment, which is even worse than our export effort. The NZI’s big revelation – no, the non-revelation because we knew it decades ago – is that our export performance is below par and getting relatively worse. On one measure, we are unique in the OECD because our global connectedness is actually going backwards.

Modern industry is subject to strong, complex and dynamic economies of scale, so a small country cannot produce everything, but has to specialise, doing some things very well, exporting them, and using the proceeds to purchase from overseas what it cannot efficiently produce here. Instead, our export performance is – well – abysmal. While we are exporting about the same proportion of GDP today as we were 20 years ago, the rest of the OECD have markedly lifted their proportion, as one must in a specialising country strategy.

The composition of exports has also hardly changed. One of the NZI report’s tables shows that our top 20 export categories are all land-based. Three quarters were in the top 20 in 1980. (By contrast, we had the most successful export diversification in the OECD between 1965 and 1980.) A comparison with a set of similar-sized economies shows our manufacturing export record is poor. A tabulation of technological intensity of manufacturing exports places us 17th out of 18, ahead only of Iceland. The report does not quote, but could have, that we are at the bottom of rich countries on one of the key measures of a modern sophisticated economy: intra-industry trade, where an economy both imports and exports broadly the same products.

We back slow horses. Some 81 percent by value of our goods exports are in markets that have slower than average growth. Worse, in over half of these slow- growing markets we are losing market share. Only four percent of the exports were in fast-growing markets where we increased market share.

Why have we done so badly? As one who wrote about this all those years ago, my observation is that we have had a wrong account of how an economy functions. Even today, too much of the public rhetoric and analysis assumes that the economy consists of only a single commodity.

Recall Roger Douglas saying in the 1980s that exports were not special. That was because exports hardly appear in the theory of the one-commodity economy. But they are special. It is a bloody sight harder to export than it is to import or sell in secure home markets. If we want to transform the economy – even if the objective is only too keep up with the transformations that are happening to other rich economies – we are going to have to do the hard grind of exporting, and not pretend they are just like the everything else.

The same faulty theory was used in monetary policy. If there is a single commodity, the rate of inflation is defined uniquely. If there are numerous commodities (as in the real world) there a numerous prices, and various measures of inflation, which diverge. A monetary policy based on one commodity can ignore exports, just as Douglas did, and squeeze them by hoisting the exchange rate. When it goes up, export profits go down. It is tough enough exporting normally, but almost impossible if profitability is undermined.

Those locked into today’s conventional wisdom will be baffled by this critique, so totally trapped are they in their narrow (undergraduate) models. We are in a rut of thinking we are a single-commodity economy. We continue to reward those whose research and advice is based on a defunct theory of an economy that was never true, and is not even approximately true. As Keynes remarked, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” As the NZI report shows, we have succeeded in failing conventionally.

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The following letter was submitted to, but not published in, “The Listener”

INTRA-INDUSTRY TRADE

Jeanette Fitzsimmons asks about my column Hard Grind Ahead on the underpinnings of intra-industry trade (Letters: 4 February). I discussed it in columns “Competitive Edges: What the New Wave of Trade Theory Can Teach New Zealand.” (November 1, 2003) and “Choose A Scenario: How Are We Going to Respond to the Doha Round Gains?” (September 25, 2005).

It is vitally important that New Zealand economic thinking does not get trapped into the comparative advantage trade of the nineteenth century, ignoring the development of the rapidly growing competitive advantage trade of the last 50 years.

Brian Easton
Listener Economic Columnist.