Cherishing the Public Health System

This entry was posted in Health, Political Economy & History, Pundit on 13th September 2024 by Brian Easton.

Comment to Fabian Society at the National Theatre Alive Film of ‘NYE’: 13 September, 2024

You will hear I have some voice limitations. It is the result of successful surgery on my larynx. When I reflect on what happened, I am struck at the quality and the expertise of the healthcare professionals who treated me with a caring respect.

I open this way, because the national habit is to report only failures. Yes, there is much to grumble about in the public healthcare system, but once you are inside, it is impressive. The challenge is that many people cannot access it in a timely manner or even at all. We do not know how many, because unlike most affluent democracies, we have never surveyed unmet healthcare needs.

The difficulty with only grumbling is that it leaves the system exposed to those who have a solution to a complex problem which is clear, simple and wrong – and probably makes things worse.

That is what happened in the early 1990s. There had been a long history of grumbling about the failures of our public healthcare system without a lot of analysis. The neoliberals arrived with their solution which was to privatise the public health system. Commonsense fought them off but the scars of the neoliberal attack remain and continue to distort not only the healthcare system but many other facets of New Zealand life.

The leader of the attempts to deal with those scars was Michael Cullen. If you haven’t read his memoir Labour Saving you must, for it is as close to a New Zealand Fabian manifesto as there is. But he was only partly successful. He did not have enough people supporting him who understood the fundamentals of neoliberalism. The vast majority of the country – perhaps more than 90 percent – dislike neoliberalism and grumble about it, but they haven’t done the hard grind of understanding it in order to provide a practical alternative. Indeed, the grumblers are prone to adopt unconsciously much of the neoliberal framework than they reject.

That Michael could make only limited progress because he didn’t have enough support is a reminder of the achievement of Nye Bevan in creating the British National Health Service. There was much support around him. A broad consensus saw the need for a comprehensive public healthcare service with, as we shall see, some powerful centres of bitter resistance. There had been a lot of preliminary work before Bevan set it up, especially the 1942 Beveridge Report, Social Insurance and Allied Services, which contributed greatly to building that consensus.

The main legislation – the National Insurance and National Health Service Acts – was passed in 1946. William Beveridge told Walter Nash that New Zealand was the only country ahead of Britain in social security. We used to boast that we were world leaders. We can no longer make such a boast, except in regard to ACC (despite the attempts of Bill Birch and Nic Smith to wreck that scheme).

Answering the question of how we fell from being a world leader to being at the back of the bunch belongs to another forum, as to whether we could get nearer the front of the bunch.

New Zealand’s public healthcare system is an integral part of the nation’s belief in itself. That is the reason why it was possible to fend off the neoliberal attack in the early 1990s. Instructively, Jim Bolger said that the health redisorganisation almost cost National the 1993 election.

What we are facing now is a creeping undermining of the public healthcare system by privatisations. We have never eradicated neoliberalism from our policy framework; it rusts away weakening strong structures until they collapse.

So we grumble, but we do not sufficiently cherish our public healthcare system. It probably means as much to us as the National Health System does to the British. But they may cherish it more. A 2013 opinion poll found that the NHS was more popular than at its creation, and more popular than the British armed forces, the BBC and even the monarchy.

That’s the point of the play we are to see. It is a British celebration of their public healthcare system by focusing on a key person in its founding. Forty-three years after he died, Nye Bevan was voted number one in poll of a 100 Welsh Heroes. (Rugby player Gareth Edwards was sixth.)

Most New Zealanders could not even name the founder of their public healthcare system. My choice would be Peter Fraser who was Labour’s first Minister of Health and who continued to drive the changes while he was Prime Minister. Yet twenty years after his death, a Labour Party Annual Conference did not even acknowledge him as a party leader.

His status has recovered. A recent consensus of three historians ranked him as only behind Seddon as our greatest prime minister. But ironically, the only solid biography of Fraser is by Michael Bassett, a neoliberal who tried to portray Fraser as a neoliberal rather than a progressive moderniser. The neoliberal rust never sleeps.

Nye Bevan would have agreed. He had better biographer, as you are going to see. Its final image is revealing. Not only is Nye being held high, but he is also being held high by medical staff supporting him in his time of need. So the play also celebrates the NHS. We should celebrate our public healthcare system.

New Zealand: A Small Economy in a Wide World

This entry was posted in Globalisation & Trade, Growth & Innovation, Political Economy & History on 10th September 2024 by Brian Easton.

‘Perspectives of Two Island Nations’, Ann-Marie Schleich (ed), Ch 14, pp.185-194.

Singapore and New Zealand have much the same population – a bit over five million people. They are both affluent economies. Because of their resource base and location, they have rather different economic structures. Yet the two small economies work together in international fora.

New Zealand experiences most of the challenges which other affluent economies face, such as population aging, slowing productivity increases, structural change, especially from dealing with global warming and the information technology revolution. Like many of the others, it also suffers from political inertia when dealing with these changes and there are the usual short-term pressures requiring macroeconomic management. Among New Zealand’s economic particularities, which will not be further covered here, are a proneness to natural hazards and high infrastructural needs reflecting its topography and population density.

This essay focuses on a series of international issues which are particular to the New Zealand economy. It does so, in part, by contrasting it with the Singapore economy.

Comparing Singapore and New Zealand

While New Zealand and Singapore are economies with a similar population size (NZ = 5.2 m; Singapore = 5.9 m in 2023), there are two crucial economic differences.

First, New Zealand’s land area is 368 times that of Singapore (268,000 kms² vs 729 kms²), so there is a lower population density. The United Nations World Population Prospects ranks Singapore’s density only behind Monaco, while ranking New Zealand at 170 out of 199 countries. (The ratio between their EEZs is roughly 4000 times greater: 4 million km² vs 1067 km².)

The difference results in quite different economic structures. Compared to the typical affluent economy, New Zealand has a large natural resource sector based on the land and sea; Singapore’s natural resource sector is negligible. As a consequence, if Singapore was located as far away as, say, the Falkland Islands, it would be as poor and as unpopulated as they are.

But it is not. Singapore is near the centre of the world economy. Almost half (about 46 percent) of the world’s population lives in countries within 4000 kms producing over a third (36 percent) of the world’s production (GDP measured at purchasing power parity). Both figures are increasing. Australia is the only country of any significant size within the New Zealand 4000 km circle. Australasia has 0.4 percent of the world’s population and 1.1 percent of its GDP. Additionally, Singapore sits on the Straits of Malacca, a critical link in the international transport network, which has been very important to its development. It is the international hub for the countries which encircle it.

Location is a source of the difference. An OECD report estimated that reduced access to markets relative to the OECD average could contribute negatively to GDP per capita by as much as 11% in Australia and New Zealand. Conversely, a favourable impact of around 6-7% of GDP is found in the case of two centrally located countries: Belgium and the Netherlands. Singapore was not included in the study, but applying the latter figure to it, New Zealand’s GDP would be depressed relative to Singapore by 16-17 percent. (Boulhol et al, 2008)

The structural consequence for the manufacturing and tradeable services sectors is that Singapore is involved with the web of Asian supply chains, whereas New Zealand manufacturing mainly consists of primary product processing or small localised market supply where importing would be too complicated or costly; its businesses are rarely in the middle of supply chains which have been one of the most dynamic developments of international manufacturing in recent times. (A nice illustration of the difference between the two countries is that New Zealand is a supplier of milk powder to Singapore, which converts it into infant formula which it distributes throughout its region.)

Historically, New Zealand’s main resource-based activity has been pastoral farming, with wool, meat and dairy products making up about 90 percent of total foreign exchange earnings. A shrewd summary was that New Zealand was an ‘exporter of processed grass’ – the processing through livestock and factory. Its comparative advantage was not so much its land – which is not particularly fertile – but a generous supply of sunlight and water. For a variety of reasons, there has been a substantial diversification of the farm sector since the 1960s into forestry, horticulture and wine.

Additionally, the fishing industry has boomed both offshore (New Zealand’s EEZ – the ninth largest in the world – also has a substantial continental shelf) and with fish farming. Its mineral resources are not comparable to Australia’s, but there are not unimportant hydrocarbon reserves (gas plus condensate) around Taranaki in the North Island.

Perhaps the tourist industry should be included among the ‘resource-based’ industries, given that scenery, as well as novelty, is a major appeal to one of New Zealand’s biggest foreign-exchange-earning industries. If the isolation adds to the attractions, it also puts New Zealand a long way from where the tourists live. In contrast, Singapore tourism arises from its location at the centre of a large population. Its tourist attractions are primarily urban.

The apparently low value-added of the primary sector as measured in New Zealand GDP is misleading. It purchases inputs from the rest of the economy and there is also substantial processing of pastoral products after the farm gate. So, the sector’s proportional contribution to earning foreign exchange far exceeds that of its apparent contribution to GDP. Without its primary sector, New Zealand would be a very different and poorer place. Tourism aside, the same cannot be said of Singapore.

Both economies have the large service sector characteristic of a modern affluent economy. But Singapore’s financial and business sector is a major Asian and world centre; New Zealand’s financial and business sector mainly services its domestic market. Singapore’s dominance arises from its location and a sound and robust domestic rule of law and has been strengthened recently by Beijing’s increasing involvement in Hong Kong’s affairs.

New Zealand and Singapore are both affluent, although on conventional measures Singapore is more so. For the latest available year (2022), Singapore output was $98,149 per capita measured in US purchasing power dollars; New Zealand’s $52,242 (or 53 percent of Singapore’s).

This measures production in each country. Singapore’s production is boosted by a higher share of foreign investment and daily workers from Malaysia, the remuneration of both needing to be deducted to calculate the effective income of residents. Adjusting for this will still not give parity.

An additional complication using Purchasing Power Parity comparisons is traded exports being measured at average international prices but domestically consumed local production at average domestic prices; in the case of agricultural produce there can be a substantial difference between the two because of domestic protection of the farm sector, which depresses New Zealand’s relative GDP.

(Auckland might be compared with Singapore because it is the New Zealand region with the densest population; it is also its main point of connection with the rest of the world. Auckland’s per capita GDP is 20 percent above the national average. However, Auckland does not have the highest per capita output, with both Taranaki with its hydrocarbon resources and capital city Wellington reporting higher levels. There is a concern that Auckland’s margin should be higher, but the relatively low margin may reflect New Zealand’s resource-based economy where most provinces are prosperous.)

It is even more complicated to compare income inequality between the two nations. Unofficial international comparisons are all over the place. One useful measure might be to compare average wages adjusted for living costs. Again, the comparisons are not very reliable, but I have never found one in which the Singapore rate exceeds the New Zealand one in a comparable proportion to the per capita GDP difference. Some, but not all, even have the real value of Singapore wages below the New Zealand one. Certainly, the bottom of Singapore’s labour market pays less than New Zealand. Altogether, that data suggest that market income inequality is lower in New Zealand than in Singapore. With its more substantial welfare state, New Zealand effective disposable income inequality is likely to be even lower.

A substantial difference is that Singapore exports of goods and services (including re-exports) amount to around 176 percent of its GDP, while its imports are 148 percent (in 2019); New Zealand’s comparable figures are both 27 percent. The ginormous Singapore figure reflects its involvement in supply chains because of its near neighbours and location on the Malacca Straits. This is evident in that Singapore’s principal exports are electronic components, refined petroleum, gold, computers, and packaged medications, while its principal imports are electronic components, refined petroleum, crude petroleum, gold, and computers. Re-exports accounted for 43 percent of Singapore’s total sales to other countries in 2000. New Zealand’s re-export proportion was nearer 4 percent, although this does not include imports of inputs such as oil and fertiliser, which are vital in the production of exports. It has little intra-industry trade.

International Trade Agreements

Despite their rather different external structures, the two economies have similar external trade strategies. Indeed, Singapore’s first international trade agreement still in force is the ‘Agreement between New Zealand and Singapore on a Closer Economic Partnership’ (ANZSEP) signed in 2001 and upgraded in 2020. It is New Zealand’s second; the first is the 1983 ‘Closer Economic Relations’ (ANZCERTA or CER for short) with Australia, which replaced the 1966 ‘New Zealand Australia Free Trade Agreement’ (NAFTA).

Since 2001, the two countries have worked together on a range of other deals including:

2005 Trans-Pacific Strategic Economic Partnership P4 – with Brunei and Chile;

2009 ASEAN Australia NZ FTA – 12 countries;

2018 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) – currently 12 countries;

2022 Regional Comprehensive Economic Partnership (RCEP) – 15 countries.

The sequence represents an evolution which began with ANZSEP. (CPTPP and RCEP might be thought of as a branching.) Australia is also involved with most of them.

Additionally, the two countries are involved in the following sectoral initiatives:

Digital Economy Partnership Agreement (DEPA);

WTO Joint Statement Initiative (JSI) on e-commerce;

Small Advanced Economies Initiative;

Singapore-New Zealand Declaration on Trade in Essential Goods

(The last deserves special mention. The Declaration on Trade in Essential Goods for Combating the Covid-19 Pandemic was signed in April 2020, just after the beginning of the Covid pandemic, indicative of the warm and ongoing relationship between the two countries. Five other countries have since made non-binding ministerial declarations.)

Some of these agreements are ‘open plurilateral’ – that is, they are designed to allow countries not involved in the original agreement to join (as happened with the United Kingdom joining the CPTTP in 2023).

The commonality of the two countries arises from both being small and being specialised producers in the world economy. Each depends on a rules-based international trading order which favours unrestricted (or very limited restricted) trade. In a free-for-all world it is too easy for small nations to be bullied. Lee Kuan Yew’s comment that whether elephants make love or war, the grass gets trampled, is apposite for New Zealand too.

Perhaps more so for New Zealand, especially as it is a processed grass exporter which gives it a formidable comparative advantage enhanced to competitive advantage by dynamic innovation and effective social institutions. Unfortunately, meat and dairy produce continues to face some of the toughest restrictions on access to other markets. Singapore has not suffered similar restricted access; indeed, its local resource sector is so limited it has welcomed international supplies of foodstuffs.

Thus, the two countries have a common interest in promoting an open international order and working together to extend it. Because that order is constantly evolving, there is an ongoing need to develop the framework, as illustrated by the four sectoral agreements which do not cover commodities and so are not strictly Preferential Trade Agreements (PTAs or, sometimes, FTAs).

New Zealand’s Economic Relationship with China

Inevitably, both countries face challenges with the rising importance of China in the world economy. Here we focus only on New Zealand and only on the economic relationships – other chapters in the book look at other dimensions.

There are two major aspects to New Zealand’s relationship with China: economic over-dependence and the way in which security tensions in relations between China and the United States and its allies impact on the economic relationship.

New Zealand is haunted by the dangers of economic over-dependence on a single economy. As recently as 60 years ago, around two-thirds of (mainly pastoral product) exports went to Britain. A decade later Britain joined what became the European Community, which at the time was commonly seen by New Zealanders as Mummy running off with a continental gentleman – or rogue.

The official and informed view was that Britain should join the community providing New Zealand’s special interests were not compromised. New Zealand had been aware of the possibility of British accession since at least 1961, and had made (successful) efforts to diversify. Between 1965 and 1980, New Zealand exports had shifted from being one of the most concentrated in the OECD by both markets and products to being near the middle.

In 2008 New Zealand entered into a free trade agreement with China, in a world first for any developed country. Today China takes almost a third of New Zealand’s exports of goods and services but it is so deeply interconnected, especially by supply chains, with East and South-east Asia, that the wider group probably takes nearer two-thirds of New Zealand’s exports (depending on how the group is defined, but including Australia).

The dominance of China in New Zealand’s trade is extraordinary. It is its biggest market for milk products, sheep meats (for beef it is only second), fish, apples, wine and honey (for kiwifruit it is third). Thirty years earlier, China did not make New Zealand’s top ten export destinations in any of these products. These products make up a significant share of New Zealand’s exports. They can be particularly difficult to manage, as Australia’s recent tensions with China illustrate. (Significantly, these product groups also present political problems in the international economy; most notably, widespread barriers to entry for pastoral products.)

New Zealand has welcomed the opening up of China’s markets which have been important to its recent prosperity. However, the ghost of the British experience remains. New Zealand went through periods of stagnation – notably in the 1920s and 1950s – because the British economy, and hence its imports, stagnated. Chinese economic growth is slowing down; that could well have a similar impact on New Zealand.

Export Diversification

New Zealand has vigorously pursued improving access to markets elsewhere. Hence the recent trade deals with Britain and with the European Union. Others are on the table, especially with India. Negotiations are also continuing with the Pacific Alliance – the Latin American regional group made up of Chile, Colombia, Mexico and Peru – and with the Gulf states – Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain. Negotiations with the Russia-Belarus-Kazakhstan Customs Union are currently suspended. There has been a long-term ambition for a PTA with the US but that is hardly on the table given Congress’s attitudes; in any case, its political price may be unacceptable to the New Zealand public. Existing trade deals are being upgraded.

As when Britain joined the EC, a major stumbling block in the negotiations has often been dairy products – and, to a lesser extent, meat – access. Protecting its dairy farmers seems to be a sine qua non of a sovereign nation.

Extending market access for New Zealand’s primary products will continue to be pursued and may grudgingly happen, but the key to reducing over-dependence on particular markets may be new products sold elsewhere as well as finding non-traditional markets.

Some years ago, I observed that Australia had been losing market share in its export markets and New Zealand had been gaining market share. But Australia had the stronger total export growth because it was exporting to faster growing markets.

Guessing which will be the future faster growing markets is not easy. Who would have expected fifty years ago – as Britain was joining the European Community – the explosive economic growth of East and South-East Asia? Probably South Asia is a good bet in the near future; possibly Latin America. PTAs for both areas are high among New Zealand’s priorities.

Guessing new products can be equally challenging. Fifty years ago, New Zealand was (rightly) obsessed with butter and cheese exports. The dairy focus then moved onto milk powder; today infant formula looms large. In the future, dairy products for the growing numbers of affluent (and elderly) may become more important. It is not only New Zealand’s resource-based exports that will be challenged. There will be new sector exports – notably ‘weightless’ tradeable services.

Given New Zealand’s tradition of state-driven development stance – an integral feature of the nation for over 150 years – it is perhaps necessary to say that the government role is likely to be limited to extending and monitoring international trade deals and facilitating and supporting trade rather than the widespread interventions – especially protection and subsidisation – of the past.

De-risking

Security tensions between China and the United States and its allies also pose challenges, especially given the increasing international recourse to economic sanctions (typically led by the US). The horror scenarios for New Zealand would be a collapse of the Chinese economy or a conflict between China and the US which involved economic sanctions between them; gradations below either scenario would be difficult enough. (The implications of such scenarios for Singapore are probably even worse.)

Because of such security horror scenarios, New Zealand treads a very careful path in its relations both with China and the US – ‘tippy toe’, one might call it. It wants to condemn some of China’s actions, but not so forcefully that it will have trading repercussions, as has occurred to Australia. It wants a security relationship with the US which is not too close because of the China dimension – in any case its public would not support a formal alliance involving a nuclear umbrella – but close enough so that were tensions to rise, New Zealand would have its submissions respected, especially if there were trade sanctions on exports important to New Zealand. (The US unwillingness to offer adequate trade access to key New Zealand exports compounds the issue of loyalties.)

New Zealand will almost certainly pursue the widespread de-risking industrial strategies being practised elsewhere. Unfortunately, the terms ‘de-risking’ and ‘decoupling’ are used loosely in popular discourse. The Ministry of Foreign Affairs (2023) provides systematic definitions:

Decoupling is where a country disconnects, separates, terminates or severely restricts its economic ties with another. It is large scale economic and supply chain fragmentation along geopolitical lines.

De-risking relates to actions to reduce a country’s economic vulnerability within its domestic system to a defined external risk. It is aimed to protect sectors and technologies that are of national security interest.

Re-shoring, on-shoring, friend-shoring and near-shoring are all subsets of decoupling and de-risking.

So de-risking is a kind of decoupling but only for strategic industries. Currently much of the international focus on de-risking is on advanced technology industries with which New Zealand is not richly endowed. The de-risking focus in New Zealand is likely to be concerned with coping with a multi-year period of widespread economic sanctions which might be triggered by, say, increased China-US tensions. Dealing with disruptions of a shorter-term nature, as occurred from the Covid outbreak, might be categorised as increasing the economy’s ‘resilience’.

While some proponents of Import Substituting Industrialisation (ISI) would have justified their early post-war strategy in terms of ‘de-risking’, had the term existed then, it generally did not. New Zealand’s ‘manufacturing in depth’ production shifted back up supply chains rather than abandoned them. Car assembly did not de-risk the economy because it still depended on CKD packs from overseas for the assembly. ISI’s purpose was employment generation.

Significant de-risking is limited for small economies like New Zealand or Singapore. The earlier discussed export diversification is part of the strategy, as is import diversification so the countries are not dependent on a single, potentially vulnerable, supply chain. In New Zealand’s case the ongoing switching to energy renewables from oil (and coal) imports is for climate change reasons, but it will also reduce its external vulnerability.

While re-shoring and on-shoring may be limited, friend-shoring and near-shoring (notably with Australia) may be important and arise when PTAs are upgraded. More generally, as already mentioned in terms of security relations with the US and its allies, high quality, friendly diplomatic relations may add a further modicum of protection if trade wars break out.

A Food and Pharmaceutical Security Agreement

I have long wondered whether there was the possibility of an international Food and Medicines Security Agreement which would rule out the application of sanctions to basic foodstuffs and medicines, as well as simplifying support for economies and regions facing crises in their supply (e.g. from a famine or catastrophe). There have been attempts to introduce such measures going back to the League of Nations – the recently agreed Singapore-New Zealand Declaration on Trade in Essential Goods is step in this direction. It may well be that the world’s appetite for such a deal has increased since Russia weaponised food supply in its conflict with Ukraine. The US is unlikely to be a signatory to any such agreement for its Senate is likely to be opposed even if its President was not reluctant. But the US might well respect the spirit of a widely supported agreement when it came to applying economic sanctions.

New Zealand as a significant food producer would have a major interest in any such agreement. It would ease pressures on it during a trade war and it would also be valuable in peace time if it reduced access restrictions to others’ domestic food markets. One of the common justifications for those restrictions is domestic food security. An agreement would reduce those security concerns.

Conclusion

While the New Zealand economy internally faces much the same challenges as other affluent economies, its smallness, its physical isolation and its industrial specialisations have often meant it has had to approach its global connectedness in a quite distinctive way. It has not been able to participate in the middle of global supply chains; it is only at the beginning and end of them. It has not been able to participate in larger economic communities, instead relying on multilateral, plurilateral and bilateral trade and other economic agreements. Additionally, it has actively supported less official organisations such as APEC Aotearoa Plan of Action (2021). It has done so energetically and innovatively, on occasions taking on a leadership role far greater than New Zealand’s significance in the final deal.

It has been able to do this because of good relations with like-minded countries which are also committed to an open rules-based global economy. The most important ally in this has been Australia, its closest neighbour which is also closest culturally, although both sides of the Tasman Sea would draw attention to their differences. (In security terms Australia is New Zealand’s only ally.) Perhaps more surprising has been the way in which it has been able to work with Singapore, over 10 hours flying time away.

Nevertheless, the successes in the development of the global architecture to which New Zealand, with Australia and Singapore, has contributed have not diminished the disappointment that pastoral exports, central to the New Zealand economy’s prosperity, still face restriction on access to the markets of many economies which have otherwise embraced open trade.

I am grateful to Alan Bollard, Malcolm McKinnon and some New Zealand public servants for comments on early draft, and to Anne-Marie Schleich..

Bibliography

APEC (2021) Aotearoa Plan of Action. https://aotearoaplanofaction.apec.org/

Boulhol, H, de Serres A & Molnar M. (2008) ‘The Contribution of Economic Geography to GDP Per Capita’, OECD Journal: Economic Studies, 2008, vol. 2008, issue 1, 1-37.

Easton, B.H. (2022) Not in Narrow Seas; The Economic History of Aotearoa New Zealand, Victoria University Press, Wellington.

Ministry of Foreign Affairs (2023) Navigating a Shifting World, https://www.mfat.govt.nz/en/media-and-resources/release-of-mfats-2023-strategic-foreign-policy-assessment-navigating-a-shifting-world-te-whakatere-i-tetahi-ao-hurihuri/

New Zealand Productivity Commission (2023) Improving Economic Resilience, https://www.productivity.govt.nz/inquiries/resilience/

New Zealand Productivity Commission (2024) Improving Economic Resilience: Report on a Productivity Commission Inquiry, NZPC, Wellington

Notes

The data is from

<><> https://en.wikipedia.org/wiki/Economy_of_Singapore

<><> https://wits.worldbank.org/Default.aspx?lang=en

<><> https://www.stats.govt.nz/

Have We an Infrastructure Deficit?

This entry was posted in Environment & Resources, Growth & Innovation, Pundit on 6th September 2024 by Brian Easton.

An Infrastructure Commission report says we are keeping up with infrastructure better than we might have thought from the grumbling. But the challenge of providing for the future remains.

I was astonished to learn that the quantity of our infrastructure has been keeping up with economic growth. Your paper almost certainly has daily reports of inadequacies in the land transport system (not to mention your travel being delayed by congestion), the energy system, and hospital and school buildings while at least once a week it probably draws attention to a telecommunications breakdown or failures in the three waters systems (more often if you live in certain cities). Similar incidents for airports and seaports pop up too.

Grumbling aside, the economic history of New Zealand illustrates why these shortages happen. The international Great Depression of the early 1930s first hit New Zealand when public works laid off workers because there were no funds to pay them. During the Second World War resources were diverted from building infrastructure to fighting (thereby causing the electricity shortages with the blackouts of the early 1950s). When Robert Muldoon hit a fiscal crisis shortly after coming to office in 1975, he immediately cut public investment. In each case economic difficulties meant we shortened our investment horizon, focusing on the present at the cost of providing for the future. A decade later Rogernomics couldn’t work out how to commercialise some of the infrastructure – privatisation did not always work for roads, say – and left a muddle. This time commercialisation shortened the time horizons of investment.

Unfortunately, we have a statistical series for infrastructure only back to 1990 so I cannot turn the previous paragraph’s qualitative story into a quantitative one: the data series since has been based on Statistics New Zealand (SNZ) data and the analysis was provided by the Infrastructure Commission (IC) (here). It shows infrastructure growing more slowly until about 1997, stagnating through to 2004, expanding to 2013 and then stagnating (keeping up with GDP growth) thereafter.

Before reporting the results, I need to say something about the measure which SNZ uses for all its capital stock estimates. It takes the value for assets in one year, adjusts them for inflation, depreciates them for wearing out, and adds in new investment.

The method of depreciation is tricky and may explain part of the almost paradoxical findings. I avoid the technical issue with an illustration. Recently a 132-year-old Wellington fresh-water pipe collapsed. The depreciation formula will value the still functioning pipe as zero. When it ruptures it will be replaced by a new one, the cost of which will be added to the value of the infrastructure. Presumably that will not affect the availability of the water to users (except for fewer interruptions). The new pipes’ contribution to GDP productivity is near zero.

The cost of extending infrastructure may not always be as productive as the existing infrastructure. Doubling a road width is likely to cost more than the original cost of the road. Sometimes it may be. The replacement of the copper wire network with the broadband one created possibilities which would have been beyond the ken of Alexander Bell.

Even so, the new infrastructure may add to human welfare without adding to material productivity. We benefit from less traffic congestion, children benefit if the classrooms are not damp, increasing earthquake resilience is of little value until one day the big one happens.

These valuation issues may explain the increasing grumbling, despite the effort of infrastructure growth keeping up with economic growth. So I proceed cautiously, using the data to provide insights which are reasonably robust in these issues. I am going to the use capital to annual GDP provided by IC as percentages. A constant percentage means infrastructure has been growing as fast as material output, a rising one that the capital stock is increasing faster than GDP. I compare 1990, the first year available, with 2022, the last year. I’ve summarised my investigations in the following table.

Infrastructure Capital Relative to Annual GDP

Infrastructure Sector (Ownership) 1990 2022 Change
Road Transport (Public) 14.3% 18.6% 4.3%
Rail, Water, Air & Other Transport (Public) 2.3% 2.2% -0.1%
Public Administration & Safety (Public) 8.1% 8.7% 0.6%
Social Housing (Public) 7.9% 3.3% -4.6%
Other Public Capital (Public) 1.9% 2.8% 0.9%
Preschool & School Education Mixed88%) 9.5% 7.6% -1.9%
Tertiary Education (Mixed92%) 2.2% 4.5% 2.3%
Hospitals (Mixed91%) 5.3% 3.9% -1.4%
Water, Sewerage, Drainage & Waste Services (Mixed68%) 5.1% 9.2% 4.1%
Electricity & Gas Services (Commercial) 14.6% 12.9% -1.7%
Telecommunications Services (Commercial) 6.9% 5.7% -1.2%
TOTAL 78.1% 79.4% 1.3%

A warning about terminology. You’ll have to look up SNZ definitions to see what exactly each sector covers. Second, I have listed the sector ownership. ‘Commercial’ may be misleading for it includes publicly owned (or partially owned) trading enterprises (such as Meridian Energy, Genesis Energy and Mercury Energy). There is also mixed ownership (according to SNZ definitions) in some sectors – the number after the ‘mixed’ is the proportion of the infrastructure which is publicly owned. ‘Public’ includes both central and local government. (Phew! about definitions.)

What we see in the table is that infrastructural capital has grown slightly faster than GDP over the 32 years. When judging we should remember that, as hinted in the second paragraph, we may have had an infrastructural deficit in 1990. In which case we may not have caught up.

The interest in the table might be the change in the composition of the infrastructure. I was surprised that the three waters sector’s infrastructure has increased substantially, as has that of the land transport sector. That is not the impression that the grumbling gives. The infrastructure of the commercially owned sectors of electricity and telecommunications have increased more slowly than GDP. Each of these potential paradoxes needs to be investigated.

Less surprising is that social housing has decreased significantly given the policies towards it that governments have been pursuing. (There is no information here about the stock of privately owned housing.) The relative reduction in core education probably reflects slow growth in the age groups, but possibly also that school buildings are not being upgraded. On the other hand, tertiary education has been adding to its buildings.

The healthcare sector is more perplexing. Healthcare spending has been increasing relative to GDP, but the buildings and equipment they use have not.

I leave investigating these issues to others and other occasions. My point is that the IC report Build or maintain? New Zealand’s infrastructure asset value, investment, and depreciation, 1990–2022 is a useful contribution to our understanding of the way the economy has been developing … and not developing.

It and the other work of IC demonstrates that thinking systematically about infrastructure is vitally necessary for New Zealand’s development. The politicians agree and are prioritising it.

The Minister for Infrastructure, Chris Bishop, has just announced his government’s policy which includes a National Infrastructure Agency to further embed the sector into the government system. Having set out the policy he said that it should be bi-partisan because it involved the long term. A bit like the Red Queen – policy first; consensus after? The other political parties were not amused. Perhaps the minister should involve them in establishing the membership of the new commission.

Brian’s Spiritual Journey (or Stasis?)

This entry was posted in History of Ideas, Methodology, Philosophy on 1st September 2024 by Brian Easton.

This is a response to Jim Wilson’s account to his spiritual journey related in ‘From Yahweh to Papatuanuku: My Long Road Home’. His is a far richer and more interesting story than mine.

I’d summarise myself as child of the Enlightenment or – perhaps more accurately– the eighth-plus grandchild of the Enlightenment. I also describe myself as secular Christian, parallel to a secular Jew, having grown up and evolved in a Christian context, but giving little attention to its religious aspects and rituals.

Religion hardly featured in the family in which I grew up. We never went to church on a Sunday. Dad said he was a ‘carathumpian’ (they eat carrots on Thursdays). It is said that when he was born he was christened in an Anglican church (his mother was a nominal Anglican), but the paternal side of the family kidnapped him and had him re-christened in a Catholic church (his father having been brought up in a Catholic family but was probably lapsed – he died before I was born). When the family got Dad back, he was re-re-christened (i.e. a third time) an Anglican, just in case. Dad response to these sectarian disputes was ‘a plague on all your houses’.

My mother had been active in a liberal and socially active Anglican church before she was married but appears to have given up after, probably because of Dad. She would talk to me as a child about religious issues but from memory it was nothing deep. (She also got marginally mixed up with Jehovah’s Witnesses via a friend, but I don’t think she was a literal fundamentalist, often giving to me naturalistic explanations for biblical events which many would judge as miracles.)

The closest I got to religion was in high school assembly. I enjoyed singing the hymns and adored the readings for the King James Bible – a literature I have loved all my life.

Reflecting I get close to the spiritual in music and text. Add in mathematics – which was a major part of my high school and subsequent life – and you may have the entirety of my spirituality, or at least its aesthetic side.

I majored at university in applied mathematics with its intimate relationship to physics and then went on to do an economics degree. I still think of myself as primarily as a scientist. Decades later I realised that my economics is heavily influenced by the modelling of applied mathematics; it is actually a very much harder branch of applied maths. I am a social scientist.

If there was a strand of religious development until this point it is now reduced to rambling threads in an active life. A topic approach may be more helpful.

I have never belonged to a church. I respect the social role of a religious community and of ritual. But it is just not me. The closest to my belonging to a church has been St Andrews on The Terrace; it is also the closest to where I have lived for forty-odd years. I got to know John Murray who was university chaplain when I was a student, and met up again with him when he was minister at Knox in Christchurch. He lived on the same street as I did in Wellington and involved me in St Andrews (where he was minister) by asking me to join the committee of the St Andrew’s Trust for the Study of Religion and Society (SATRS), where I hooked up with Lloyd Geering. John did not have much theological impact on me but Lloyd did, as did Robin Lane who became assistant minister. (Anglican minister Richard Randerson is another minister with whom I have had a bit to do – our children went to the same school.)

Lloyd and Robin encouraged me to study the development of the Jewish and Christian religions which has been fascinating exercise for a scientist, because the only serious evidence are texts. I have been to numerous lectures including by overseas visitors and have about a metre and a half of religious books in my bedroom. There are a few about other religions – Chinese and Buddhism (I recall a lecture by Don Culpit in which he almost convinced me that Jesus was influenced by Buddhism; I have since realised that he was also greatly influenced by Greek philosophy).

The shelf contains nothing on Hinduism, although Jim Wilson says I should give it more attention. I dismissed the religion because of its pantheon of gods, as I have done with the religion of the ancient Greeks (although I know a lot of its mythology as you would expect of anybody with a background in Western civilisation – they are good stories). I was never taken by the Trinity either; were I a Christian I would be a Unitarian.

Occasionally I lectured for SATRS. If there was a theological dimension in them it was based on Catholic social teaching. Rerum Novarum, introduced to me by former Labour MP Ted Keating. It is a fascinating encyclical because in 1891 Catholics were struggling with the rise of industrial society; Protestantism largely evolved with industrialisation and asking them about it is like asking fish about water. The bulk of Catholic theology evolved in a rural society, so it had to adapt to the Great Transformation.

My parents were mildly anti-Catholic in the way that Protestants tend to be in those days. (Dad’s second baptism seems to have washed over him.) But toleration was their watchword – we had Catholic families on both sides of our house. My greater objection is to a hierarchical church especially one that gets between me and my conscience (or, if you wish, God). I am always uncomfortable in a Catholic Church because of its ornate religious decoration.

I took one (valued) year of philosophy at university under a much-loved George Hughes, who was also an Anglican minister. I have read much erratically since. My shelves of philosophy books would exceed my religious ones. Aside from scientific, social and political philosophers, those that have most influenced me are Socrates (before Plato misrepresented him) and Popper – for I am an inveterate sceptic – together with Descartes, Hume, Kant, Kierkegaard, Buber and Rawls. (I confess that in few cases I have read all their main works.)

I am not a religious mystic but accept there are mysteries about the universe. Eddington said ‘Not only is the universe stranger than we imagine – but it is also stranger than we can imagine’; that was before quantum mechanics was fully underway. (I’d have preferred him to have said ‘weirder’.) Here is how I cope with some of the mysteries.

On Hume’s question of cause, George Hughes taught me it as a methodological imperative; one just takes it that there are causal processes. If the sun did not to get up in the morning, one would wonder what caused that.

(I remain uneasy about quantum mechanics. I did its first wave only when I was at university. Even that was troubling. I have been less able to get my head around the second wave – not sure anybody has. Richard Feynman said, ‘if you think you understand quantum mechanics, then you don’t’; more briefly – ‘shut up and calculate’. I am haunted by Schrodinger’s cat, who may challenge Aristotle’s law of the excluded middle.)

I take a similar imperative approach to free will. I simply assume that we have it or that we should operate on the assumption that we have it.

On the question of God, the issue seems to me to what we mean by ‘god’. What is evident is that meaning has changed though the ages. Once god was meant to explain everything we didn’t understand. Today we understand many more things, such is the progress of science, and so for most of us any role of god has been rolled back. (I read an account of the Hebrew bible which pointed out that as the text progresses through time, Yahweh’s role in the matters of mankind diminishes.)

Is there a place for God today?

Earlier, I may have demeaned the importance of Karl Popper in my thinking when I said he was a major source of my methodological scepticism. He has been much more important than that, not only providing an account of how we engage with the world as scientists but providing an even wider perspective. In particular, he splits our world into two (actually three, but the third world of ideas is not necessary for this discussion). There is an objective world which is accessible – at least in principle – to scientific procedures, and subjective world which is not.

That makes Popper – and me – a dualist who holds the view that mental phenomena are, at least in certain respects, not physical phenomena and that the mind and the body are distinct and separable from one another.

I’m comfortable with that distinction. The sceptic says that I may be wrong, that one day scientists will be able to access our minds in the way they can day access out bodies. Probably not in my lifetime, probably never. We’ve struggled too long with the mind-body problem and made so little progress that it seems unlikely we will ever solve it. (Caveat here. If we ever get our heads around quantum mechanics, we may be able to tackle the issue in currently inconceivable ways – Eddington notwithstanding.)

This approach poses the following problem. How do I know that your, or anyone’s, consciousness is similar to mine? I cannot verify that it is with any scientific method – a definition of dualism. Yet I believe the proposition is true just as I believe in causality and free will. As far as I am concerned, you have a consciousness similar to mine.

That leads me to Martin Buber’s position. (There are some philosophical steps I am jumping over here.) There is an interaction between myself and (potentially) any other person which is not totally accessible to scientists. That interaction is summarised by ‘I-Thou’ (Ich-Du), a relationship that stresses the mutual, holistic existence of two beings. Buber argued that this is the only way in which it is possible to interact with God, and that an I-Thou relationship with anything or anyone connects in some way with the eternal relation to God.

So for me God is there in the ‘between’ of a relationship. It is a conclusion not dissimilar to Jesus’s ‘where two or three are gathered together in my name, I am there among you’. Were there no consciousness, there would be no God (I do not rule out other animals having consciousness to a degree).

(As an aside, or perhaps not, I cannot write without a reader in mind. Indeed, my writing voice changes depending on the reader. Perhaps my writing is an example of the ‘between’. I could never have written this piece without having read Jim Wilson’s book – Jim being the reader I have in mind here.)

Resolving this puzzle, if only partially, does not have much effect on my spiritual life. I remain an agnostic functioning on the basis that if there is a God, he or she (if God may be personified) will accept I have been behaving as if there is one, despite my doubts.

(I found affirming the core scene in the C.S. Lewis Narnia story, The Silver Chair. As a rule, the Narnia series portrays Sunday School religion, but at a critical point in this story, the marshwiggle Puddleglum, then underground, is told there is no Narnia above. He responds: ‘I’m going to live as like a Narnian as I can, even if there isn’t any Narnia’. Existentialism for children.)

This leads to my last great philosophical challenge. What is the basis of ethics? I don’t mean what should be one’s morality. I am comfortable with Kant’s categorical imperative ‘act only according to that maxim whereby you can at the same time will that it should become a universal law’, itself a successor to Jesus’s golden rule: ‘do unto others as you would have them do unto you.’ (There are similar injunctions in other religions.)

I can see such injunctions are related to Buber’s I-Thou, but only dimly. WhatI am unclear about, is where such moral statements exist in the order of coherent thought – what is the underlying ethical methodology. They are obviously not a part of science’s objective world, so that puts them into the subjective world, I think. Popper was a deeply moral thinker, but I have never found an account of how his personal morality fits into his world vision. That is true for the other philosophers I have studied. Ethics just is.

Obviously religion and morality are deeply intertwined, but you can have morals without being religious in the normal meaning of the term – Socrates and some Chinese philosophers are examples. So while historically religion was a vehicle for promoting morality – I’m afraid not always, in my opinion, the right morality for sometimes it was far too judgmental on and restrictive about the human condition – it is not evident to me that religion is necessary for morality. Perhaps spirituality is.

There I must leave the puzzle of ethics. Perhaps I shall make more progress with it in the rest of my life; more than I expect to make with quantum mechanics.

As I began this as a response to Jim Wilson’s memoir. It sets out my thinking on these issues more explicitly than I have ever written before, thereby exposing the gaps in it and encouraging me to think more.

The Principles of the Treaty

This entry was posted in Governance, Maori, Pundit on 30th August 2024 by Brian Easton.

Hardly anyone says what are ‘the principles of the treaty’. The courts’ interpretation restrain the New Zealand Government. While they about protecting a particular community, those restraints apply equally to all community in a liberal democracy – including a single person.

Treaty principles were introduced into the governance of New Zealand by the Treaty of Waitangi Act 1975 whose purpose was ‘to determine whether certain matters are inconsistent with the principles of the Treaty.’ However, the Act did not state what those principles were.

The Court of Appeal had to define the principles in the case of New Zealand Māori Council v Attorney-General (1987) (a.k.a. the ‘Lands’ case or the ‘SOE’ case) because they are in the State-Owned Enterprises Act 1986. The judges did not codify their principles, but a common summary of their conclusions is:

The Crown has the right to govern. The principles of the treaty ‘do not authorise unreasonable restrictions on the right of a duly elected government to follow its chosen policy. Indeed, to try and shackle the Government unreasonably would itself be inconsistent with those principles’.
The Crown has a duty to act reasonably and in good faith. The relationship is ‘akin to partnership between the Crown and Māori people, and of its obligation on each side to act in good faith.’ The judgment draws parallels with ‘our partnership laws’.
The Crown has a duty to protect Māori interests. ‘The duty of the Crown was not just passive but extended to active protection of Māori people in the use of their lands and waters to the fullest extent practicable.’
The government should make informed decisions. The Court said that in order to act reasonably and in good faith, the government must make sure it was informed in making decisions relating to the treaty. That will ‘require some consultation’.
The Crown should remedy past grievances. ‘If the Waitangi Tribunal finds merit in a claim and recommends redress, the Crown should grant at least some form of redress, unless there are grounds justifying a reasonable Treaty partner in withholding it – which would be only in very special circumstances, if ever.’

Subsequently the Waitangi Tribunal endorsed these principles.

In 1989 the New Zealand government responded to the Court of Appeal with a set of principles. No subsequent government has modified them. They were:

The government has the right to govern and make laws. (The kāwanatanga principle)
Iwi have the right to organise as iwi, and, under the law, to control their resources as their own. (The rangatiratanga principle)
All New Zealanders are equal before the law.
Both the government and iwi are obliged to accord each other reasonable cooperation on major issues of common concern.
The government is responsible for providing effective processes for the resolution of grievances in the expectation that reconciliation can occur.

As lawyers have pointed out, Article 3 of Te Tiriti applies to all New Zealanders. If the term ‘Māori’ is replaced by ‘New Zealander’ and the term ‘iwi’ by ‘voluntary associations’ the above principles are those intrinsic to the governance of a civilised liberal democracy.

Suppose every Māori was to disappear (perhaps a virus wiped out everyone with a Māori gene). Which of these principles in its generalised form would become redundant? I hope none of them. While their effect is to restrain the government in its treatment of a particular group (Māori), in a liberal democracy those restraints apply equally to all – including the minority of one person. They are generally not platitudes; many hardly apply in Putin’s Russia.

The implication of Article 3 is that individual Māori do not have a special status. But do iwi, Māori collective institutions? (Because Māori have a right to develop, today’s ‘iwi’ covers not only the tribes which were their social organisations in 1840 but more recently evolved ones, such as the Māori Women’s Welfare League and the Māori Urban Authorities.)

Do the treaty principles give iwi special rights? Yes and no. They say that the Crown is duty bound to consult iwi. But consultation is an integral element of a liberal democracy. Iwi are fortunate that their right is stated more explicitly.

I’ve discussed the issue of co-governance here. Even as Prime Minister, Chris Hipkins said he did not understand what it means. Public discussion has muddled self-government, partnership, co-management and co-governance. The three earlier notions are integral to the running of a liberal democracy.

While Māori claim kaitiakitanga (guardianship) rights over community and public property, so do a lot of my green friends. They are examples of taonga katoa, discussed below.

I am not sure whether preservation and promotion of Māori culture is a Tiriti issue. Any civilised society would do that. (The same applies to Pasifika culture, given Aotearoa New Zealand’s share of those peoples.) Te reo is discussed below.

So how are we to judge ACT’s proposed Treaty Principles Bill? The bill is not yet before Parliament, but ACT’s manifesto said it would define the principles of the treaty as:

The New Zealand Government has the right to govern New Zealand.
The New Zealand Government will protect all New Zealanders’ authority over their land and other property.
All New Zealanders are equal under the law, with the same rights and duties.

The proposal looks like an attempt to redefine Te Tiriti o Waitangi. Evolving the interpretation of past events is organic; putting one in statute is not; it fossilises it. At a deeper level, it is not unusual for an authoritarian state to reinterpret history to suit itself. (Witness Putin about the history of the Ukraine.)

While its principles 1 and 3 are consistent with those of the Court of Appeal, the ACT proposal omits other key treaty principles. One is uneasy that we should pass a law which seems to repeal so casually the deliberations of the courts on such weighty matters, especially as those that underpin a liberal democracy.

ACT’s Principle 2 is narrower than the principles set out by the Court of Appeal. It is a limited interpretation of the second article of Te Tiriti, reflecting the neoliberal view that it is only about private property rights. Māori had few of those in 1840; property rights were held by the community, much to the frustration of Europeans who wanted to acquire land. Neoliberals object to community ownership. (Elinor Ostrom was made a Nobel Laureate in 2009 for her work explaining how such collective ownership can work very effectively.)

Moreover, the second article of Te Tiriti covers far more that what we conventionally think of as private property. We can see that from the evolution of the drafts of the treaty. Up to what is called the ‘English version’ there was a list – ‘Lands and Estates Forests Fisheries and other properties’. The text signed on the treaty grounds jumps to ‘ratou wenua o ratou kainga me o ratou taonga katoa’– ‘their lands, their villages and all their treasured things’. (Because translators would not make that jump, I am of the view there was a revised English draft from which Te Tiriti was translated; it probably ended up in Colenso’s – now lost – papers.)

‘Taonga katoa’ is a very strong term – much more encompassing than ACT’s ‘other property’. For instance, the courts have ruled that ‘te reo’ is one of those taonga. Had this been raised with Māori on 6 February 1840 – unlikely because people didn’t think that way then – the Māori response would probably have been ‘he aha to tikanga?’ – ‘what do you mean?’ Ask it today, the response is a very positive ‘āe, āe’.

My thinking is greatly influenced by Edmund Burke and, indeed, Friedrich Hayek when he is not a neoliberal. They saw organic development at the core of social progress. Sometimes the government has to accelerate or enable it. It should avoid retarding it or fossilising it. That is what the ACT proposal does.

In arguing that the ACT proposal retards organic development and undermines democratic principles, I am not arguing that the party is inherently reactionary or authoritarian. Rather, I don’t think the proponents of the bill have thought these issues through. We shall see how they respond when such issues are drawn to their attention. One hopes they will reaffirm the Court of Appeal’s principles of the treaty which underpin a liberal democracy and adopt a more accurate historical account of the drafting of Te Tiriti and the subsequent organic evolution of its interpretation.

The paper on which this column is based has been checked with various legal authorities.

Trading Towards a Multipolar World

This entry was posted in Globalisation & Trade, Pundit on 23rd August 2024 by Brian Easton.

.AUKUS is a backward-looking policy. The World needs to move forward.

Economists think that the more interconnected countries are by trade and investment, the less likely warfare will occur between them. On many occasions countries have consciously intensified those interconnections as an alternative to war. Examples include the federation of the American states into the USA following a confederation after customs conflict between Maryland and Virginia; the European Coal and Steel Community (which evolved into the EU) tying up the French and Germany industries after three painful wars; ASEAN which was started after the Indonesian confrontation of Malaya ended; recently India has improved its physical and trade links with its neighbouring China and Pakistan.

Alas, economic relations between China and the US have deteriorated. That this occurred under both President Trump and President Biden suggests a structural tension arising from jostling over their places in the world. According to the World Bank, the Chinese economy is now a quarter larger in total output than the US economy, although its output per capita is only about a third of the US level.

One can explain the First World War and the follow-up Second World War as a consequence of Germany catching up in economic size to Britain and trying to find a comparable place in the world. (Neither noticed that the US was already bigger.) We may be grateful that moving from one global hegemon, Britain, to a second, the US, did not involve conflict between the two (although the two world wars accelerated the transfer from a weakened Britain).

It is unlikely that China is going to be the next global hegemon. Rather, we are moving to a multipolar world where there is none. There is a plausible economic model which predicts that world economic output, and hence power, is moving to where the populations are – the situation before British industrialisation. It occurs because of the ease with which technology and capital can transfer between countries.

That does not mean that Chinese productivity will catch up to the American level – not in this century anyway. Factors like the resource base and social organisation mute the economics. (Nor is it clear what will be the effect of global warming.)

India’s population overtook China’s last year and is expected to greatly exceed it in 2050 (1.7b vs 1.3b), while Pakistan (370m), Nigeria (360m) and Indonesia (320m) may then have populations comparable to the US’s (380m). (The European Union’s is already bigger, at 450m – without much change expected in the future.)*

Economists work on the basis that in the long run wars are decided by economic might once there is a commitment. As the war in the Ukraine prolongs, Putin’s only hope must be that the West has not the commitment to defeat Russia outright. I am not sure what the conclusion is over a short war with nuclear weapons except that no one wins. So while military strategists focus on the shorter term, the longer outlook is likely to be dominated by economic and related considerations.

So behind today’s incipient economic warfare and military machinations we face a multipolar world whose shape is uncertain. There may be regional hegemons. Russia is contesting with the West for Eastern Europe; China wants to be the hegemon in East Asia, which the US is contesting (especially over Taiwan); India has similar ambitions in the Indian Ocean; Iran’s ambition seems to be the Middle East hegemon although anyone who thinks they know what is going on there has not been following closely enough. However, while regional hegemony may be a local military and political solution, global economic connectedness means regions are interdependent.

The challenge for the world, then, is how to get from the current world order, in which the US acts the hegemon, to a multipolar world in which the US is but one of four or so big economies. Full multipolarity may be less than a quarter of a century away.

The US does not seem to see the issue this way. It is largely preoccupied with the short-term task of trying to maintain its current hegemony in a world whose order it sees as not too different from the immediate post-war one. It might have been the only effective global power in 1950, when it was producing around 27 percent of the world’s goods and services (measured in common prices – ‘purchasing power parity’, as all the output data in this column is), but by 2023, the US share was 15% (as was the EU’s, with China at 19% and India’s at 8% – everyone else was below 4%).

Trump admitted the weakening of the US when he insisted that the European nations increase their military spending. However, and ironically, it is Putin who has given the Europeans the spur to spend more, although that is partly because they no longer trust the US commitment to them.

The US strategy seems to be to compensate for its growing weakness by strengthening its alliances. When NATO invited Australia and New Zealand (and Japan and South Korea) to their deliberations, it was not with the intention of involving the two countries in a European war again (at least I hope not) but it was trying to entice the Europeans to make a commitment in the East Asia/West Pacific region.

Similarly, the AUKUS pact is trying to get Britain involved (Australia does not have much choice). The Pillar Two extension is probably more about involving Japan and South Korea than involving us. (Sorry, folks, we really are unimportant.) The difficulty with AUKUS is that it does not seem to be forward looking, contributing to a pathway to the oncoming multipolar world.

That faces New Zealand with a choice of looking forward or looking backward. In an earlier column, I pointed out the short-term conflict between our security and trade interests, between involvement with the US and with China. This column is about long-term concerns. (Parliament grounds must already be booked for demonstrations by educationalists, environmentalists, the gun-control lobby, healthcare advocates, Māori, those concerned with poverty, pro-Gaza and pro-Israel supporters, public servants and unionists. Does the Government need to take on peaceniks as well?)

All of which suggests we should not get too involved in AUKUS Pillar Two. Yes, the US is a friend, but you don’t always join in when a friend is behaving unwisely. Mind you, I am not sure that the US will listen to a friend advising the more prudent course of action of developing an international order which makes more room, especially, for China and India. (It is said that countries don’t have friends, only interests.)

On the economic front we should be encouraging economic interconnectedness, especially a rules-based international order. Disgracefully, the US is vetoing appointments to the WTO Appellate Body which deals with disputes arising from disagreements between trading partners. (Presidents Obama, Trump and Biden have all vetoed, so there is a structural problem here, not a whim.) That weakens the international rule of law.

The US has what amounts to a veto in the IMF and the World Bank, reflecting international circumstances in 1945, not those of 80 years later. With the weak IMF plus the Chinese and US treasuries and the ECB we have, in effect, four world central banks which is, for example, fouling up sorting out countries with serious debt problems.

These arrangements established immediately after the Second World War and reflect neither today’s world nor the future’s. (As do the five permanent seats on the UN Security Council, to which New Zealand objected when that it was established.)

New Zealand may have little influence over the evolving world order. In so far as we have, we should be putting our effort in assisting it to move towards the reality of multipolarity. Ultimately New Zealand is having to balance its short-term interests against its long-term ones. I am not sure our friends always understand this.

* UN Population Division’s central estimates. I also looked at various projects of economic output. They are all over the place but are insistent that the US share in the total will fall further.

Should Social Media Help Fund News Providers?

This entry was posted in Pundit, Regulation & Taxation on 16th August 2024 by Brian Easton.

The underlying economics of the Fair Digital News Bargaining Bill rests on intellectual property rights.

I have written elsewhere about the tension between information as a public good which economic efficiency requires to be freely available and yet, because it is costly to produce, may require payment to those who create the information. Any practical resolution of the tension will be imperfect.

A common resolution is to give the producer of the information an intellectual property right. Examples include patents and copyright. They are essentially human constructs. The details of the laws which define these rights vary from country and through time. A major factor in the evolution of intellectual property rights has been changing delivery platforms.

Thus arises the need for the Fair Digital News Bargaining Bill currently before Parliament. The rise of social media and its use of news poses issues which we may, or may not, want to resolve. News can be costly to produce – a comprehensive news service certainly is. Under what circumstances are the social media platforms such as Google and Meta – the two examples I use here, but there are many others – entitled to use news generated by newspapers (and broadcasters)?

In standard market terms, newspapers are very odd institutions. Purchasers do not pay for the full cost of the news they read. Historically, perhaps two-thirds of the media’s funding has come from advertisers who, in effect, pay the newspaper for access to the readership. The revenue coming from advertising meant that subscribers were getting a heavily subsidised product.

It was not an ideal solution to the provision of news but, especially in a democracy which depends on a vigorous independent news service, it was the best arrangement that it has been able to devise. (There may be a role for a government-subsidised news service. As valuable as RNZ, is, the existence of private sector media reduces the possibility of the government interfering with its public news service.)

The model which was successful for over a hundred years broke down with the arrival of the worldwide web. Many people shifted across to it for their news sources and so have the news providers. But their advertisers shifted to a different part of the web, especially social media, because it enabled them to better target the audiences they were seeking.

As a result the traditional news media has lost much of its advertising revenue. It tried to recover the loss by raising the price of its subscription to its papers, by charging for use of its websites and by donations and sponsorship. These additional sources have not covered all the lost advertising revenue and the news media has had to cut back on its news coverage – in practice that means fewer journalists chasing the news.

But the new social media also needs access to the news. Google would provide a limited service if the search engine did not include news stories; Meta uses news stories to attract the audience which its revenue-producing advertisers seek.

The Fair Digital News Bargaining Bill attempts to address this muddle by giving news media, in effect, an intellectual property right to their stories. Or rather, to extend existing their property rights. After all, both NZME and Stuff pay overseas news providers for the stories they republish.

Social media does not always republish the full story. Sometimes it is just the headlines which also cites the news site where the story sits. The effect of the proposed legislation is to make it clear that this infringes a property right of the news provider who is entitled to charge for that use. (The bill covers only particular sites; essentially news providers but not blogs. I suppose that others, in principle, could be covered by the proposed provisions – such as when this column cites a news site – but this is not the intention of the bill.)

How to enforce the new property rights? I suppose it could have been left to the courts but New Zealand has followed other jurisdictions, such as Australia, Britain, Canada and France, which have an arbitration process. Yes, it is clumsy and expensive – but it is likely to be less clumsy and less expensive than litigation. (Providing an alternative to expensive litigation is not new; small claims courts are another example.)

How has social media responded in these other jurisdictions? Google seems to have decided to accept the arrangement, paying large sums to the news providers. Canadian ones receive CD $100m annually (about NZ$15m on a per capital basis), perhaps t percent to the news providers’ advertising revenue. Presumably, the commercial judgement is that without the news sites the search engine would be crippled and people would go to others. The additional revenue will, one assumes, go into more news coverage; Google’s customers will be among the beneficiaries.

On the other hand, Canadian Meta has abandoned providing news from Canadian news sites so it pays nothing. Presumably its commercial judgement is that it will not lose a lot of custom as a result. Presumably too, the Canadian news providers have judged that it makes little difference to them if they don’t get referrals from Meta. On the other hand French Meta – it was Facebook then – not only agreed to pay up but agreed to provide news in French.

The Fair Digital News Bargaining Bill is at the select committee stage. It was introduced by the Hipkins Labour Government, but the Coalition Government has decided to proceed with it. (Despite, to my surprise, objections from some neoliberals who, I would have thought, would have welcomed improved enforcement of intellectual property rights.) When Parliament passes the bill, a step will be taken to making our news media more financially secure. Even so, its prospects remain fragile.

Hierarchy or Colleagues?

This entry was posted in Governance, Health, Pundit on 9th August 2024 by Brian Easton.

The claim that there are currently 14 layers of management at Health New Zealand, raises wider issues of how we organise systems.

I want to write a column about current proposals to redisorganise Health New Zealand but, frustratingly, the Coalition Government has not released evidence of its claim that the successor to the District Health Boards is projected to lose $1.4b in the current year, after running a small financial surplus last year. That is a massive turnaround. The cynic must wonder whether the projection involves a bit of creative accounting, a cynicism heightened by the delay in publishing it.

The political purpose may have been to change the top management of Health NZ by appointing a commissioner because the government has little confidence in the previous management. If so, that is their judgement, using smoke and mirrors to disguise what should be a routine governance decision.

Certainly there were smoke and mirrors in the government’s claim that there were ‘14 layers of management’ at Health NZ. The list was probably packed for political purposes. A better one might have been

1. Commissioner
2. Chief Executive
3. Regional deputy CE
4. Hospital manager
5. Service manager
6. Clinical director
7. Ward management
8. Clinical staff
With the Minister of Health on top.

The minister’s list had the Commissioner at its top and the Patient at its bottom, giving the impression that the purpose of patients is to support the managers – an absurd impression, but too often that is how the managerial hierarchies think and operate. (One recalls the university joke – I think it is a joke – that once the role of registries was to obtain funding to enable academics to work; nowadays academics generate funding to enable registries to work.)

There is a current government belief that there are too many wasteful bureaucrats on the government payroll and they should be made redundant. I was surprised at the ease with which the Chief Executives met and even exceeded their targets. The cynic might conclude that the apparent overstaffing of the agencies implied that almost every Chief Executive in the public service had allowed overstaffing and was incompetent. My guess is that problems will occur on the frontline as a result of the back-office redundancies.

Whether Health NZ is overstaffed is a matter of contention. There are claims that the numbers of back-office staff have already been reduced. Even so, according to the government list there is at least one additional layer added by the creation of the centralised Health New Zealand and abolition of the DHBs. Even if this has resulted in fewer bureaucrats, its effect is to separate the most senior management even further from the front line of patients.

It is too easy for generic managers to isolate themselves from the real activities of their agency. Recall that the Senior Leadership team at Statistics New Zealand during the 2018 Census crisis had no experienced statisticians on it. The phenomenon is not confined to the public sector. When Fletcher Building had a crisis arising from failing building contracts, there was nobody on its board with building experience.

Universities are collegial enterprises (knowledge is collegial). However, they have become increasingly hierarchical to the point that deans of faculties (they have fancier names nowadays) are often appointed without consulting the college of academics and are simply imposed on them. In one case (only one?) the dean quickly proved incompetent and became thoroughly disliked. The dean’s response was a Praetorian Guard of management layers which appeared to do little, so the academics told me. They thought its purpose was to protect the dean when the academics became too bolshie.

Multitudes of management layers also reduce accountability. Nobody gets blamed for failure because there are always others to blame. The Peter Principle, that managers rise to their level of incompetence, does not apply in New Zealand; here they get promoted well beyond it.

Lacking the expertise to manage professionals, generic managers not only distance themselves with management layers but they also overuse consultants rather than developing the skills internally. This also reduces managerial accountability, since failure can be attributed to the consultants – it is rare to point to poor management of consultants.

Recently there was severe under-staffing at the Dargaville hospital. Once upon time the complaints would have landed on the desk of the CEO of the DHB based a car-drive away in Whangarei. Instead, it landed on the Wellington-based Minister of Health’s desk (rather than Health NZ’s senior managers). While I have no doubt the matter is serious for those living in Dargaville, surely the Minister should not have got involved unless there was evidence of systemic failure in Health NZ.

What can be done to reduce the dependency upon hierarchical structures? An obvious step is to reduce the layers and sublayers of management. A second is to devolve responsibility; that was the point of DHBs being in charge. A third is to build into upper management connections with those at the front end. (Avis used to require their managers to spend one day a week on a front desk.)

Upper management is besotted by its agency’s finances, measured by the balance sheet. Perhaps the excess waiting that the sick face could be listed as a liability (assessed as the cost of eliminating it) in the balance sheet. The listing would confront those at the top with all those who were suffering. (Even so, it would soon manipulate the waiting list to reduce the liability without actually reducing the client discomfort.)

Do we need such hierarchical structures? Consider treatment in a hospital – say, an operation. Yes, there is a hierarchy in the theatre, but fundamentally it is a cooperative team – just as your local sports team has a captain but the team plays together (respecting the captain). The full health team includes administrators – like booking clerks – but they are working together, respectful of one another and in touch with their patients. Even the team captain typically interacts with the patient as a human being.

Where a hierarchy is necessary, Simon Sinek observed:

Senior doctors and especially hospital administrators don’t know what their job is. When you ask them ‘what is their priority’, they say ‘patients’. It’s not. It is to take care of the people who work in the hospital – of the people who take care of the patients. Every administrator, every senior doctor, every senior nurse should be preoccupied with one thing and one thing only: are my doctors OK, are my nurses OK, is my staff OK? And if they get that right, the staff will devote their time and energy taking care of each other and the patients. …

Each tier in a hierarchy should be looking down to the tiers below instead of, as happens far too often, looking upwards. If they insist on looking that way, turn the list of management provided by the Minister of Health layers upside down, putting patients at the top.

The Quest for Opportunity

This entry was posted in Distributional Economics, Education, Political Economy & History, Pundit on 2nd August 2024 by Brian Easton.

David Seymour describing himself as an ‘old-fashioned lefty’ caused a flurry in the commentariat.

The responses were not always informed. One thought he was saying he was a Marxist. In fact it is relatively recent when Marxism became an important strain on New Zealand’s left. Our Communist Party formed only in 1921, after the rise of the Soviet Union. In 1890 William Pember Reeves, a key New Zealand left-wing thinker, wrote a series of articles on socialism and communism covering a myriad of leftish thinkers. His treatment of Marx’s thought was described by his biographer, Keith Sinclair, as ‘inadequate … Marxism had not then, of course, achieved its pre-eminence among socialist systems, nor were Marxists the most numerous socialists, so [Reeves] neglect of them is not surprising.’ That is not to dismiss Marx. He was a great nineteenth century intellectual, but his ideas have not been at the heart of the broad New Zealand left.

What Seymour actually said was

‘And in many ways, I’m an old-fashioned lefty … I believe that we pay taxes for education so every child has the opportunity to be developed to their full academic potential. I don’t think we’re doing that right now.’

He is referring to the Fraser-Beeby principle articulated by Minister of Education Peter Fraser in 1938:

‘The government’s objective, broadly expressed, is that every person, whatever her or his level of academic ability, whether he or she be rich or poor, whether he or she live in country or town, has a right, as a citizen, to a free education of the kind for which he or she is best fitted and to the fullest extent of her or his power.’ [1]

The two were only stating a sentiment which went back a long way in our history. When I was writing Not in Narrow Seas I was faced with the question of why Europeans came to New Zealand in the nineteenth century. If they wanted to migrate, North America and Australia were closer and easier.

Pursuing an answer proved tortuous, but the short one is that, while there were many and varied reasons, an important one was that our Pakeha ancestors pursued opportunity, especially the opportunity to live the rural life that was collapsing in England as a consequence of industrialisation. Their ambition was to own their farm. Initially, many of those farms were ‘subsistence’ – largely self-sufficient, only marginally interacting with the commercial market. But the advent of refrigeration proved seductive and the farms became profitable commercial enterprises.

As the country urbanised, opportunity remained a central aspiration of the nation, captured in the Fraser-Beeby principle and the claim that New Zealand was a class-free society. (‘Social class’ not Marx’s notion of political class as in ‘class conflict’.) Sinclair wrote in 1959 that ‘New Zealand is not a classless society. It must be more nearly classless, however, than any other society in the world’. Well, somewhere in the world there has to be a society which is at the top of the rankings and it just could be the one down-under.

Or was. Even as this was written Sinclair’s friend and colleague, Bob Chapman, was identifying emerging class divisions in urban New Zealand. They have continued, which has meant that there are fewer relative opportunities for many groups. Hugh Lauder and David Hughes showed that a child with a working-class background had to have, on average, a significantly higher IQ than one from the middle class in order to get to university. But this was based on 1980s data and we do not know whether things have got harder or easier after 1990; the increased access to tertiary education may have ghettoised the poorest. I do know, anecdotally, of able young people who have missed out on the education they were capable of because of class/family circumstances. One might argue that the Coalition Government’s education policies will sharpen class divisions as it will make it easier for those higher in the social rankings to buy educational advantage for their children.

The above discussion was primarily about Pakeha. The Māori story is different. We talk about it, ignoring that there is hierarchy in Māori society. Focusing on Māori/Pakeha as the most significant societal dividing line has suppressed discussion of class in Aotearoa New Zealand.

As class has evolved here, the equal opportunity goal faded. When do you last remember a politician – Seymour aside – talking about the Fraser-Beeby principles? [2]

So one might welcome Seymour’s raising the issue of educational opportunity, hoping his concerns will be taken up by a wider public. But in a fundamental way his conclusion is misleading. There has long been a tradition in New Zealand that the schooling system is key to providing opportunity. The implication is that it can compensate for family failings.

How families fail and succeed is largely outside the remit of economics, except in one key area. If we put families under economic pressure, they are more likely to fail. The 1990 Richardson-Shipley benefit cuts and the neoliberal twist of taxation away from the rich have put additional pressure on family incomes, increasing social divisions and reducing opportunity for those at the bottom.

In principle the 2018 Child Poverty Reduction Act was intended to address these pressures although its targets were not pursued at all vigorously by the Ardern-Hipkins Government. By softening the targets, the Coalition Government has indicated it will be even less vigorous. Children will continue to turn up in the education system poorly prepared to take advantage of it no matter how much money is poured into it. The irony is that Seymour wants to prioritise strengthening the state over strengthening families.

If Seymour wants to identify ‘left’ as support for promoting opportunity for all, so be it. But in that case the right, as far as he is concerned, are opposed to the notion. Maybe Seymour is really an old-fashioned lefty.[3]

[1] It was drafted by his head of department, Clarence Beeby and is gender-amended as, later, Beeby said that Fraser and he would have wished.

[2] There is one exception I know of. Some New Zealand economists – among then some in Treasury – discuss Amartya Sen’s notion of ‘capability’. The complicated idea is not too different from the Fraser-Beeby principle. It hardly touches our public policy.

There is also the 15-year longitudinal study Competent Children which demonstrates the importance of family.

[3] State solutions rather than supporting the private sector is a feature of the political right in other areas such as crime. Contrast Tony Blair’s claim to be ‘tough on crime; tough on the causes of crime’.

Working Together: Singapore and New Zealand.

This entry was posted in Globalisation & Trade on 1st August 2024 by Brian Easton.

‘New Zealand international Review’, July/August 2024, Vol 49. No 4, pp.19-20.

I recall thinking when the ‘Agreement between New Zealand and Singapore on a Closer Economic Partnership’ (ANZSEP) was signed in 2001 that an agreement between the two tiny economies was a bit of a squib. In fact The deal has proved a cracker, providing the foundation of a partnership which has enabled the two economies to work together effectively in international economic fora.

This is all the more surprising given how different the two economies are even though they have much the same population – a bit over five million people – and are both affluent. They have rather different economic structures because of different resource bases and location.

First, New Zealand’s land area is 368 times that of Singapore (268,000 kms² vs 729 kms²), so there is a lower population density. The ratio between their EEZs is roughly 4000 times greater (4 million km² vs 1067 km²). (For comparison, Lake Taupo is 616 kms².)

This results in quite different economic structures. Compared to the typical affluent economy, New Zealand has a large natural resource sector; Singapore’s sector is negligible. If Singapore was located as far away as, say, the Falkland Islands, it would be as underpopulated and as poor as they are.

Moreover, Singapore sits on the Straits of Malacca, a critical link in the international transport network, which has been very important to its development. It has enhanced the locational advantage by good governance which is a foundation of economic growth; it is the international hub for the countries which encircle it.

The structural consequence for the manufacturing and tradeable services sectors is that Singapore is involved in the web of Asian supply chains, whereas New Zealand manufacturing mainly consists of primary product processing or small localised market supply where importing would be too complicated or costly; its businesses are rarely in the middle of supply chains which have been one of the most dynamic developments of international manufacturing in recent times. (A nice illustration of the difference is that New Zealand is a supplier of milk powder to Singapore, which converts it into infant formula which it distributes throughout its region.)

Both economies have the large service sector characteristic of a modern affluent economy. But Singapore’s financial and business sector is a major Asian and world centre; New Zealand’s financial and business sector mainly services its domestic market. Singapore’s dominance arises from its location and a sound and robust domestic rule of law; it has been strengthened recently by Beijing’s increasing involvement in Hong Kong’s affairs.

A substantial difference is that Singapore exports of goods and services (including re-exports) amount to around 176 percent of its GDP, while its imports are 148 percent (in 2019); New Zealand’s comparable figures are both 27 percent. The ginormous Singapore figure reflects its involvement in supply chains because of its near neighbours and location on the Malacca Straits. Its involvement is intra-industry trade is illustrated by Singapore’s principal exports being electronic components, refined petroleum, gold, computers, and packaged medications, while its principal imports are electronic components, refined petroleum, crude petroleum, gold, and computers. Re-exports accounted for 43 percent of Singapore’s total sales to other countries in 2000. New Zealand’s re-export proportion was nearer 4 percent, although this does not include imports of inputs such as oil and fertiliser, which are vital in the production of exports. It has little intra-industry trade.

Despite their rather different external structures, the two economies have similar external trade strategies. Indeed, Singapore’s first international trade agreement still in force is the Agreement between New Zealand and Singapore on a Closer Economic Partnership (ANZSEP) signed in 2001 and upgraded in 2020. It is New Zealand’s second; the first is the 1983 ‘Closer Economic Relations’ with Australia, which replaced the 1966 ‘New Zealand Australia Free Trade Agreement’.

Of course, the agreement did not pop out of nowhere. Important has been the long-held warm and friendly relations between the two countries perhaps derives from their heritage as a part of the British Empire but consolidated by the New Zealand army base in Singapore from 1961 to 1989.

The 2001 agreement triggered the two countries working together in other international economic issues. Specific deals have included:

2005 Trans-Pacific Strategic Economic Partnership P4 – with Brunei and Chile;

2009 ASEAN Australia NZ FTA – 12 countries;

2018 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) – currently 12 countries;

2022 Regional Comprehensive Economic Partnership (RCEP) – 15 countries.

The sequence represents an evolution which began with ANZSEP. (CPTPP and RCEP might be thought of as a branching.) Australia is also involved with most of them.

Additionally, the two countries are involved in the following sectoral initiatives:

Digital Economy Partnership Agreement (DEPA);

WTO Joint Statement Initiative (JSI) on e-commerce;

Small Advanced Economies Initiative;

Singapore-New Zealand Declaration on Trade in Essential Goods

The Declaration on Trade in Essential Goods for Combating the Covid-19 Pandemic. (The agreement was signed in April 2020, just after the beginning of the Covid pandemic, indicative of the warm and ongoing relationship between the two countries. Five other countries have since made non-binding ministerial declarations.)

Key to the commonality of the two countries’ approach is that each is a small specialised producer in the world economy, depending on a rules-based international trading order which favours unrestricted (or very limited restricted) trade. In a free-for-all world it is too easy for small nations to be bullied. Lee Kuan Yew’s comment that whether elephants make love or war, the grass gets trampled, is apposite for New Zealand too. Working together reduces the impact of the bullying.

Based on a chapter in “Perspectives of Two Island Nations: Singapore and New Zealand” edited by Dr Anne-Marie Schleich.

Balancing External Security And The Economy

This entry was posted in Globalisation & Trade, Political Economy & History, Pundit on 26th July 2024 by Brian Easton.

New Zealand is again having to reconcile conflicting pressures from its military and its trade interests. Should we join Pillar Two of AUKUS and risk compromising our markets in China?

For a century after New Zealand was founded in 1840, its external security arrangements and external economics arrangements were aligned. Britain, then the international hegemon, provided the security and the main export market together with the capital which flowed into this country. New Zealand even twice fought on the other side of the world (three times if you include the South African War) as a part of the deal.

But Britain was weakening relative to rising Germany and the United States. The Fall of Singapore in 1942 demonstrated that Britain could no longer guarantee New Zealand’s security and in 1951 it joined the ANZUS Treaty with Australia and the United States without Britain. That was a factor which led to New Zealand accompanying them into Vietnam between 1963 and 1975. The treaty began to unravel when New Zealand declared it was nuclear-free and in September 1986 the United States suspended its ANZUS treaty obligations toward it.

Neither country completely abandoned the other militarily. Since 2021 New Zealand has been considering joining Pillar Two of AUKUS, a strategic defence partnership between Australia, the United Kingdom and the United States. Pillar Two is about sharing advanced technology, like artificial intelligence and quantum computing. The technology could also include drones or support systems for hypersonic weapons. It does not involve nuclear weapons, which comes under Pillar One. (Japan is in a similar position.)

The unravelling of our economic ties with the UK came later. In 1966 more than 60 percent of our exports still went to Britain. Many might see Britain joining the European Community in 1973 as the switch point but it would be only symbolic. New Zealand had been rapidly diversifying; less than 30 percent of exports went to Britain in that year.

In 2008 New Zealand signed a free trade agreement with China which became our biggest export market. Today’s dominance of China in New Zealand’s trade is extraordinary. It is our biggest market for milk products, sheep meats (for beef it is only second), fish, apples, wine and honey (for kiwifruit it is third). Thirty years ago, China did not make New Zealand’s top ten export destinations in any of these products.

New Zealand now sends almost a third of its exports to China. East and South-east Asia and Australia are deeply economically interconnected with China and this wider group takes nearer two-thirds of New Zealand’s exports. (Britain now takes about 2 percent.)

China does not dominate our capital markets to the same extent. The big foreign investors in New Zealand are Australia, Britain, the US and Japan. During a financial crisis we would go first to the US (or the IMF which it dominates), as happened in 2008.

In principle, the mismatch between our security and economic alignments should not matter, but currently China and the US are at loggerheads. A simple explanation is that the US has been the world hegemon both militarily and economically for the 80 years since the Second World War. While the US military is still the largest by far, and its international reach is like that of no other power, China is challenging it in what it deems as its own region/neighbourhood (including Taiwan, which it regards as an integral part of China).

The economic story is different. The World Bank’s latest figures suggest that China’s GDP is more than a quarter larger than that of the US measured in comparable prices.* Of course with its bigger population, China is much poorer in per capita terms but the sheer magnitude gives it economic heft.

China wants to use its economic (and military) might to challenge – even overturn – the American version of world order. Detailing this, and its prospects, is a much longer article than can be fitted in here. Instead, the column focuses on New Zealand’s response in this uncertain world.

What is especially worrying is that neither the US nor China seems to be greatly committed to a world order based upon the rule of law, for each has undermined or ignored the rules when it has suited them. In a free-for-all world it is too easy for small nations to be bullied. Lee Kuan Yew commented that whether elephants make love or war, the grass gets trampled.

The danger is that as the two powers contest, we may be forced to take sides. The outcome could be unpleasant. Australia’s decision to side openly with the US led to China’s withdrawal of market access for some of Australia’s products to signal it was not happy.

This provides a context to the current dispute over whether New Zealand should join Pillar Two of AUKUS. No doubt there has been a vigorous debate within the Ministries of Foreign Affairs and Trade, and Defence. (There was one about sending troops to Vietnam.) The Coalition Government seems to be more pro-US than the previous one. On the other hand, exporters – the Auckland Business Community is prominent here – is nervous that moving towards the US will compromise the key export market.

That suggests that we should not get too close to the US militarily. Frankly, I am haunted by the experience of the Vietnam War when the US deliberately lied to us. It did the same to Britain to inveigle them into the Iraq War. The concern is whether a cumulative set of commitments will put New Zealand in a position of having to take sides if a shooting war over Taiwan or the South China Sea breaks out. Pillar Two probably would not make much difference but it is a shift towards that possibility.

That is not to side with China which, to be frank again, has some very unpleasant human rights (wrongs) policies. Even so, we should recognise China’s growing place in the world order, support its increasing involvement but insist that the evolving order should be one where the rule of law is strengthened rather than weakened.

Ideally irrespective of these strategic considerations, we should be diversifying away from the China economic complex. Easier said than done, for it largely depends on how entrepreneurial our exporters are.

Central government can support them by pursuing further trade liberalisation. About three-quarters of our goods exports are covered by free trade agreements. We are hoping for more with economies in the Middle East and Latin America (and we also seek further liberalisation in services). However, the two big outsiders are likely to elude us: the US and India.

While the US is enthusiastic for New Zealand joining in its military ventures, its five million farmers and those in agriculture-related jobs are far more politically important than five million New Zealanders living in a remote (unfashionable) corner of the world.

One might have thought that India would be keen to help us get out of the China-US quandary, since it does not want to be in it either. We will, no doubt, get a free trade deal with it in due course, but it will be limited, especially in dairy products. It has almost a billion households in rural areas, and while not all are farming, their numbers are sufficient to be politically significant. (Both countries have more dairy cows than we have: 300m odd in India, 9m in the US against 6m in New Zealand – there are 7m in China and growing.**)

In summary, most countries think we are too small and not strategically located enough to really matter. (Australia and some Pacific Island states would be the exception.)

Our quandary is not unique. It is even harder for the ten ASEAN nations. Vietnam was invaded by China in living memory and the Philippines and Vietnam are confronting China in the South China Sea. Yet their economies are even more integrated into China’s economic nexus. We should be paying much more attention to how they balance the pressures.

The ASEAN strategy has been described as ‘multi-alignment’, in which states form overlapping relationships with several major powers. Presumably that is what New Zealand means by its ‘independent foreign policy’. It can be tricky to apply. Singapore says it does not have a US naval base. Even so, there is usually a US navy capital ship tied up to a wharf, which a cynic might think was specially built for the purpose – just ‘visiting’.

Finding the balance to ease the quandary will not be easy. I had a friend who was on the Department of External Affairs Vietnam desk during the height of the conflict. Like me, he wished we had not sent the troops, but he understood the pressures. Years later, Tim commented that he thought Prime Minister Keith Holyoake, advised by the DEA, got the balance about right, doing the minimum necessary. One hopes for a similar wisdom from today’s leadership.

* World GDP shares in thee same prices are China 19.1%, US14.8%, EU 14.7%, India 7.9%, Russia 3.5%, Japan 3.4%, Brazil 2.4%, Indonesia 2.3%, Britain 2.2%.

** India produces 24% of the world’s milk (including buffalo milk), the US 12%, China 5%, New Zealand 2.5%.

Flooding Housing Policy

This entry was posted in Pundit, Social Policy on 19th July 2024 by Brian Easton.

The Minister of Housing’s ambition is to reduce markedly the ratio of house prices to household incomes. If his strategy works it would transform the housing market, dramatically changing the prospects of housing as an investment.

Leaving aside the Minister’s metaphor of ‘flooding the market’ I do not see how the announced strategy is going to quickly resolve New Zealand’s housing problems.

His strategy seems to have evolved over the last five years following the establishment of the Ministry of Housing and Urban Development and is much the same as a Labour Government would have proposed, point-scoring and minor differences aside.

Supply-side initiatives take time. It is not like the Reserve Bank changing the Official Cash Rate, with an immediate impact on financial markets which works its way quickly into the new mortgages and mortgage renewal markets.

We are currently adding about 30,000-40,000 dwellings a year to the housing stock. (There will be more new ones since some will replace demolished dwellings.) Suppose we add an extra 10,000 a year. That would not only be a strain on the building industry but the Reserve Bank might feel it necessary to further restrain the economy. Given there are over 2 million houses the additions to the total stock would be about 0.5% a year. Is demand so elastic to such a small change in supply? (For a review of the changes in the intercensal housing stock see here.)

In any case, it is unlikely that the announced changes will produce a sharp increase in the supply of new buildings. It is not just a matter of putting up a shed on new piece of land. There is the accompanying infrastructure including water and roading. That in will take time to be installed, even if the local authority is enthusiastic. So the strategy is about the long term and not ‘flooding the market’.

The Minister’s strategy includes a long-term target of the price of houses costing ‘three to five’ times (annual) household incomes. ‘What I want is for house prices to moderate over time, so that in 10 to 20 years’ time, we have essentially gone a long way towards solving our housing affordability problem.’ Currently the multiple is 6.6 nationwide. In Auckland it is 8.1, Wellington 6.1, Christchurch 5.8, Hamilton 6.6, Dunedin 5.7 and Queenstown-Lakes almost 15.

So the Minister wants a cut in the relative price of housing of between 25 percent and 55 percent. That does not mean he expects the nominal price of houses to fall 25 to 55 percent, a reduction which would cause widespread financial distress (particularly if it was to happen rapidly). Rather, the Minister is hoping that nominal incomes will rise faster than housing prices over the long term.

To make rough sense of it all, suppose he envisages a 40 percent relative cut in house prices in fifteen years (the Minister’s midpoints). Allow inflation at 2 percent per annum and real incomes to rise their long term average of 1.5 percent p.a.. Now suppose the average price of a house is $1m. (Quotable Value thinks it is about $900,000 but the million keeps it simple.) The 6.6 ratio would mean an average household income about $150,000 p.a. (Which is also a bit high – this is an illustration). In fifteen years’ time, under those moderate inflation and growth assumptions the household is likely to be earning about $250,000 p.a. The ministerial ambition for the ‘four’ ratio means the price of housing will still be $1m (i.e. four times $250,000). So the Minister’s target means that there will be no nominal capital gains in house prices for a long time to come.

You can fiddle around with these assumptions, but realistic alternatives suggest that, under the Minister’s ambition, capital gains on housing will be negligible and house ownership will be a poor investment prospect. For most people home ownership will make still make sense, even though they will make no capital gain when they sell (for neither will the next house they buy have gone up in price). However, treating your house as a financial investment or investing in property may not make as much sense.

Of course, it is only the Minister’s ambition. He won’t be the Minister of Housing in fifteen years. But he can be held to account while he is. Will housing prices be stagnant on his watch? In my judgement the proposed measures will not be sufficient to attain the ambition. My guess is that a serious effort to restrain house price rises will also require further fiscal and monetary measures.

Since the cost of building houses and providing infrastructure will go up with inflation, the value of land will fall under the Minister’s scenario. That seems very unlikely. In the more stable past, house prices have rise a few percent annually faster than consumer prices. What the reverse would mean is difficult to analyse but there would be a very different housing and investing world from the one we are, or were, used to.

So will housing prices stagnate to the extent of the Minster’s ambition or will they rise much like they did in the quieter past. Your guess is as good as mine, but I shall be surprised if they stagnate. I am not holding my breath waiting for the flood.

Learning From Brexit

This entry was posted in Globalisation & Trade, Growth & Innovation, Pundit on 12th July 2024 by Brian Easton.

Whether Britain leaving the European Union was right or wrong, good or bad is for the Brits to decide. But there are lessons about international trade to be learned from Brexit, especially as it is very unusual for an economy to break so completely from its major training partner.

In Econ101 we are taught Ricardo’s theory of comparative advantage. In summary it says that specialisation makes economic sense; that it is a good idea for you (or a country) to do what you do best and trade the surplus for something you want from someone else who (or other country which) does it comparatively better. An economist then spends the rest of her or his life exploring the caveats and subtleties of the theory when it applies to the real world. It’s not logically wrong – it’s just that the real world is more complex.

For example, there are transaction costs in trade. I wrote a book, Globalisation and the Wealth of Nations, which explored the consequences of the costs of distance – transport, inventory, information … Standard trade theory was not a lot of help. It is a static account of the economy and when we measure the allocative gains from trade we get a small percentage increase. (Which, not incidentally, is why is was so hard to find the promised gains from Rogernomics.)

Yet the evidence points to economies thriving with international trade (although not necessarily everyone in each country). In the end I concluded that the growth came not just from the specialisation but was reinforced by economies of scale and economies of agglomeration, and by competition which stimulates innovation and competitive advantage.

This conclusion is orthodox. The book’s twist was to highlight the costs of distance. Think of them analytically as a natural tariff. As these barriers to trade decline, economic growth is stimulated. (The same happens between regions within a country.) The distance costs have fallen dramatically over the last two centuries and driven globalisation – increasing interconnection between economies. (Since they wont fall as much in the future, we are likely to see some slowing down – even stagnation – of the globalisation of the markets for goods. However, service trade is likely to continue to grow as information technology transfers becomes more efficient.)

So it is no surprise that the British economy has suffered from the rise in the barriers which resulted from the withdrawal from the European Union. The UK government’s Office of Budget Responsibility calculated that Brexit is costing 4 percent of GDP over the long term – that adds about three years of stagnation to the British economy. That is probably an underestimate because the dynamic effects are almost certainly greater. (Both investment and skilled labour have moved to the continent to avoid the barriers.)

Many of the barriers come from the fact that the two regimes no longer have the same regulations. The difference has resulted in increased documentation and phytosanitary requirements (measures to eliminate the spread of diseases transferred through livestock, plants and such like). Part of the point of the withdrawal, as far as the Brits were concerned, was to allow them to pursue their own regulatory regime because, it was argued, Brussels was too intrusive. (Some of the alleged rules, like how bent bananas could be, were very funny and entirely fictitious.)

The move to common regulation was the result of the 1992 Maastricht Agreement which aimed to convert the European Community (as it was then) of a multitude of markets into the single market of today’s European Union. (Just as we do not have different regulations between the North and South Islands.) There is a sense that the Brexit vote was a rejection of the transformation of the EC (which they joined in 1973) to the EU which they left in 2020. (I am not discussing here how badly the withdrawal was handled.)

What surprised me was how onerous and complex the regulatory barriers have been – how damaging they have been to trade and economic growth. It has not just been the queues of lorries awaiting documentation clearance at ports like Dover – vivid illustrations that they are. The delays have resulted in some British producers of fresh products where time is critical – like fish and flowers –giving up exporting to the EU altogether.

Sometimes the amount of documentation – pages and pages of it – has been extraordinary. I don’t think the EU is being bloody minded, although Brussels can be clumsy. Perhaps over time they will simplify their requirements and so will the Brits. Which means that there will be increasing regulatory alignment, which Brexit was trying break away from.

There is a lesson here which the Brits may yet learn. While one may yearn for sovereign independence, whatever the de jure situation once there is an international relationship – in trade as well as a host of other areas like human rights and defence – de facto sovereignty is compromised.

The problem of these regulatory barriers arising from misalignment and documentation apply elsewhere in world trade; an exporter to multiple markets may have to meet quite differing requirements. There have been attempts to reduce the barriers, but multilateral efforts have been half-hearted. Free trade agreements increasingly pay attention to them.

There cannot be total regulatory alignment. Our negotiating partners know that our bottom lines include the provision that Te Tiriti o Waitangi is sacrosanct; it protects the Māori broadcasting regime from international investors.

One place where we can do better is moving the trade documentation onto an electronic basis. I do not know just how much that will facilitate our exporters and trade generally. But the lessons from Brexit suggest that it will, probably more than one thinks.

Were I a Brit, I’d favour measures which reduced these transaction costs even if the resulting regulatory alignment reduced the country’s economic sovereignty.

Footnote: A new area of regulatory alignment is likely to be about carbon emissions. The EU is already moving towards requiring those who export products to it from the ‘heavy’ industries – such as aluminium, cement, chemicals and steel – to meet the EU’s domestic carbon emission standards.

They have not yet begun addressing farm emissions of methane and nitrous oxide. But they will. Our farm sector needs to be preparing for that. Rather than the government imposing an emissions regime, it might tell them:

‘Over to you. If you don’t get on with developing your own strategy you will be one day be excluded from some of your valuable export markets. The government’s advice is to get onto it as fast as you can. Biological change takes time. Inconvenient regulatory can change a lot faster. The government will give you all the reasonable support you require.’

The Pharmac Fiasco

This entry was posted in Health, Pundit on 9th July 2024 by Brian Easton.

If you don’t understand how things work you make foolish mistakes. To explain how the government got into its cancer drugs muddle, we need to explain first how New Zealand’s pharmaceutical purchasing system works.

There is a parallel between Pharmac and the Reserve Bank of New Zealand. The Government sets the monetary policy framework with its legislation and the Policy Target Agreement (PTA) between the Governor and the Minister of Finance (plus some other minor matters, but they are all in public). The Bank then implements the monetary policy, independently of the Government. Which is a good thing, given how complicated the monetary system is together with the tendency of politicians, and others, to want to interfere for short-term purposes. (In the previous framework, Prime Minister Rob Muldoon would literally ring the Governor directing him to alter the monetary settings for political purposes, such as impending by-election.)

Similarly, Pharmac implements the Government’s purchasing of pharmaceuticals within a statutory framework. It includes the prior institution, Medsafe, which determines whether a drug is safe, although that says nothing about its effectiveness. That Medsafe decides a drug is safe does not automatically mean the pharmaceutical is available free on the public health; if it is not, it can be used in New Zealand but must be privately purchased.

The equivalent of the PTA is that each year Parliament votes a sum which Pharmac uses for its total pharmaceutical expenditure. Like everything else to do with the public health, there is never enough. So Pharmac tries to purchase drugs as cheaply as possible. Where a drug is off-patent and there is competitive supply, it seeks the cheapest high-quality supplier. An individual tablet may cost only cents (like paracetamol before the retail markup).

In order for Pharmac to fund a medicine, it needs:

– to identify a clear health benefit for New Zealanders;

– a deal with a medicine supplier;

– enough money in the budget to fund it this year and in future years;

– and to have consult on the proposal with everyone who as an interest.

Once these align, Pharmac can work quickly to fund the medicine.

Most of the drugs which Pharmac funds are off-patent. However, most of its expenditure is on drugs which are on-patent and supplied by a single Big Pharma (although sometimes there may be close alternatives). They are very expensive because of the patent monopoly. It is there to provide Big Pharma with the incentive to develop new drugs. (A common figure mentioned for the cost of development of a drug is a billion dollars, but there is a lot of variation, and many potential drugs prove ineffective which may mean the development costs are wasted.) That means there is a big margin between the cost of producing the drug and the price that the Big Pharma thinks is justified by its investment.

The margin varies by country. For instance, HIV-Aids medication is supplied cheaply to poor Africa. I do not discuss the issue further; it is quite complicated. What is relevant here is that the margin means that Pharmac has the opportunity to beat the price down from the top rate the Big Pharma charges (typically to the USA).

Big Pharma loathes the arrangement. (What if every country in the world followed this practice; it is unique to New Zealand?) They have even tried to abolish Pharmac in trade deals we have negotiated (particularly with the US). New Zealand has been staunch because the effect could be close to doubling the cost of the public pharmaceutical budget.

Those negotiations can be fraught given that they are between a monopsonist (single-purchaser) Pharmac and a monopolist (single supplier) Big Pharma. For obvious reasons they are commercially secret. Or rather, I thought it would be obvious; I presumed that was the reason that there was no explicit provision for the costs of additional drugs in the May budget. At the extreme, if it was stated $1m had been set aside to purchase drug X, you don’t have to be very smart to work out what Big Pharma would do. (In their turn, Big Pharma don’t want any other country to know what prices they are charging New Zealand.)

However, the negotiations aside, the great problem Pharmac faces is which drugs to fund, given its limited budget. Some drugs are going to miss out.

I shan’t go through the full evaluation procedure but an economist might summarise it as Pharmac trying to get as much bang as it can for each buck – the economist’s ‘bang’ is usually measured in years of quality life. (For other considerations see here.) For instance, suppose Pharmac had to choose between spending the same amount on a cardiac medication which extended life for ten years and some cancer medication which extended life for ten months, most of us would think the choice is a no brainer.

Not everyone, because those suffering the cancer would still demand that their drug be funded. Very often they blame Pharmac, which is unfair because Pharmac is limited by the funds made available to it – to its ‘PTA’ target.

Gee, it has taken a lot of explanation to get to the most recent controversy – and I have left bits out. It is clear though that many who get involved in the pharmaceutical disputes have not understood even the above simplification.

Opposition politicians easily get swayed by public demands for a particular drug, making promises which in government are difficult to keep at the simplified level of their thinking. Hence the current fiasco.

After much political muddling (and, one suspects, a lot of hard administrative work) the government has announced it would give Pharmac extra funding of $604 million over the next four years to cover ‘up to 54’ new medicines including 26 cancer treatments. That includes all the 13 cancer drugs National promised during its election campaign, or replacements that are ‘as good or better’. Observe that the announcement gives Pharmac room to negotiate rather than be an easy walkover by Big Pharma. Moreover, it allows Pharmac to fund other drugs which it judges are as effective at improving quality of life of sufferers.

The funding comes out of the contingency operating allowance the budget provides for new policies and unexpected changes. That is exactly what the reserve is for, although I, among others including the Treasury, have expressed concern that the amount provided in the budget is too small. (here) It is now smaller.

The Labour Opposition joined the chorus pointing out the Coalition Government was failing to keep its election promises. Curiously, during the election campaign Labour failed to get across that the Ardern-Hipkins Labour Government had markedly increased Pharmac funding by more than 70 percent (excluding that for Covid), while Pharmac funding under the Key-English Government was near stagnant. The National-led Government’s recent policy announcement represents a major break from the earlier National Government.

Hopefully, that means it has come to grips with how Pharmac works and is committed to make it work, leaving Pharmac to make the technical decisions. There is always the fear that the Big Pharma will prevail and that Pharmac will be neutered, to the taxpayers’ cost.

The other concern is that it seems likely that we could get a better bang for our health buck by spending additional funds on reducing some of the intolerable waiting lists in the public health system. However, there are no ‘Big Pharma’ to stoke public indignation. And the contingency operating allowance is getting smaller.

What Is Social Investment Analysis?

This entry was posted in Environment & Resources, Pundit, Social Policy on 28th June 2024 by Brian Easton.

Evaluating the impact of social policies will be very difficult but the government does not seem to be doing much real evaluation.

A couple of terms that have recently become fashionable are ‘cost-benefit analysis’ (CBA) and ‘social-investment analysis’ (SIA), typically proposed by people who have never done either. They sound good but have their limitations. Providing their limitations, are understood they can assist making better decisions. Too often they are ignored, and the resulting analysis has little value, merely reinforcing the conclusion that the decision-maker who commissioned the analysis was going to make anyway.

CBAs entered public policy in the 1960s evaluating the return on irrigation projects. (Locals, including their MPs, were very keen on the projects because they involved large government subsidies.) By the early 1970s they were being used by the National Roads Board to rank spending on roads. A decade later they had a central role in the Major Projects (‘Think Big’) debate. They were then necessary because the projects depended upon government subsidies and other kinds of public support.

The debate was traumatic; economists even lost their cool. Part of the problem was that we had to develop the analytic frame as we went along. (The only New Zealand manual we had was for irrigation projects – I am not making this up.) We economists made mistakes but any economic advice was usually overruled by the politicians who went ahead with even some known ‘dogs’. (Roger Douglas admitted he made wrong decisions – against advice – over New Zealand Steel.)

The policy conclusion was that government shouldn’t subsidise businesses, which explains many of the more sensible changes under Rogernomics. Unfortunately, politicians remain keen on incentives for political reasons and sometimes government involvement is unavoidable – like the broadband rollout and the current debate on the inter-island ferry service.

Moreover, the government is also involved in many decisions which are not strictly business ones. The social area exists as a public policy issue because it cannot be commercialised.

CBA/SIA has been most extensively used in the health sector. But note that once again the politicians have tried to overrule careful analysis, as when they announce they will fund particular pharmaceuticals. (The economic issue is whether the same funds could be spent more effectively – with better health outcomes – on other treatments; we don’t know unless careful analysis is done.) The application of these techniques in the health area is fraught with difficulties. I know, having worked on a number of evaluations in numerous areas and having been a member of an international working party which developed a manual on how to apply the techniques to the analysis of substance use and abuse (published by WHO).

That a manual is necessary was evident from a strange debate over the last published social cost of alcohol study which paid no attention to the issues the working party sweated over and did not understand them; neither did its critics.

The government has announced it now intends to apply Social Investment Analysis in areas such as education, justice and social services. It has even set up the Social Investment Agency to lead its use.

The idea began under the Key-English Government and was implemented under the Ardern-Hipkins Government as the Social Wellbeing Agency. For all the fanfare, sentiments, promises and expenditure, there have been few results to show SIA’s effectiveness.

Instructively, there is no published manual of how to do an SIA. The unwillingness to learn from past experiences or other disciplines is illustrated by the various contributors to Social Investment: A New Zealand Policy Experiment. So bereft were they of practical experience one is reminded of the joke that a consultant is someone who knows 69 ways to make love but has never kissed a girl.

Will the experiment be successful? The experience is that its success, if any, will be limited and hardly at all if there is no manual. There will be a host of undiscussed problems about how to construct the framework.

For instance, a key point in these analyses is what is the perspective of the study? How is success going to be judged? In the health sector we tell the story of the ‘exploding cigarette’, which is highly addictive, generating lots of tax revenue, but kills the person on the day they retire so the state does not have the subsequent health and retirement costs. From the fiscal perspective an ideal policy, except it has left out all consideration of the person’s welfare.

Before you say ignoring people’s welfare is absurd, the feedback I hear is that the government’s SIA focuses on the fiscal savings to the government. So the perspective is the taxpayer, with the rich benefiting more than the poor. I hope it is not true, for in every health evaluation with which I have been involved, the suggested treatment involved net public outlays in the long run because it was trying to benefit the sick.

I’ve given but one example of the minefields we found when developing the WHO report. They’ll all be there in an SIA ,and probably some more. Often there has been a shortage of quantitative evidence in the health evaluation projects with which I have been involved; sometimes that evidence is key to the assessment.

A major issue is, as the term ‘investment’ indicates, that the evaluation has a strong time element. (No, I am not going to go over the time-discount rate issue again – I think we got it wrong forty years ago, and we are still getting it wrong.) Rather, analysis requires evidence about policy impacts decades later. For instance, good nutrition for pregnant women affects the health of their grandchildren. (The mechanism seems to be that the health of the child in utero is affected, and in the case of a girl child, that will affect her children.) Most of that sort of evidence is not available for social service issues. (The health sector is much better provided with the required evidence than social services will be, but even then it is frequently lacking.)

The temptation is for the advocate – or the consultant advising the advocate – is to make up any missing numbers. Sometimes the policy conclusion hinges on their magnitude; you will not be surprised that there is an optimistic bias in their creativity. That bias will feed the politicians.

CBAs and SIAs only informed decisions. They are rarely decisive. The Coalition Government agreement said it will make decisions that are ‘principled – making decisions based on sound public policy principles, including problem definition, rigorous cost benefit analysis and economic efficiency.’ That was almost certainly written by someone who has never done a CBA.

In practice the government seems to be oblivious to the principle. most evidently in the justice area such three-month boot camps. The impression I get – I am not expert in the area – is that the evidence says they won’t work. Did the politician commission any SIA – let alone a rigorous one – before they directed the policy to be instigated? (Will they direct there be follow-up evaluations?) How many of the current government’s policies proposals have been made with the promised rigour? It would be useful if at each policy announcement a journalist asked to see the ‘rigorous cost-benefit analysis’.

SIAs could make a significant contribution to social policy if they got us to focus of the evidence to inform it. (In the health sector it is called ‘evidenced based medicine’.) I am not optimistic; it involves a massive change in the way we make public policy.

Mainstreaming Māori

This entry was posted in Maori, Pundit, Social Policy on 21st June 2024 by Brian Easton.

Mainstreaming need not be inherently anti-Māori. It will be if it is done badly because it will be anti-those-in need, and proportionally more of them are Māori.

That the Coalition Government says it will deliver public services on the basis of need rather than, say, race deserves consideration, even though many will jump unthinkingly to the conclusion that it is anti-Māori. Such mainstreaming does not cover many issues dear to Māori, such as the promotion of te reo and Māori culture, the status and relevance of Te Tiriti o Waitangi, their role in the governance of the country and remediation of past wrongs. Discussion of these needs to take place, but not in this column, which is a reflection on the policy of mainstreaming.

Not that reflection is common in the dialogue about Māori issues. Statistics New Zealand reported that 19.6 percent of the population counted in the 2023 Population Census said they were of Māori descent. The proportion has increased over time, which is not surprising given that ‘intermarriage’ is common. (The quotation marks are to indicate that the parents are not always married.) Additionally, people learn about forgotten ancestors.

The census does not ask how many of us have European, Asian or Pasifika ancestors. (Its question is for the purpose of calculating Māori seats.) I suspect that if we could work it out, there would be many more New Zealanders with more European ancestors five generations back than with Māori ones.

It was also widely reported that 17.8 percent were of Māori ethnicity, so not all those of Māori descent describe themselves as of Māori ethnicity. Less prominence was given to the 67.8% who said they were of European (or Pakeha) ethnicity or the 17.1% who said they were of Asian ethnicity, 7.1% Pasifika and the 3.0% who said something else. Yes, they add up to more than 100% because people have multiple ethnicities. The cross-tabulations are yet to be published but they are likely to show that over half of those reporting Māori ethnicity also tick European ethnicity.

There is a tendency to report ethnicity on a prioritisation basis. First is all those who say they are Māori including those who tick other categories, then there are those who tick Pasifika but not Māori, as well as the other categories, then Asian on a similar basis, and then only European if they do not tick any other ethnic category as well. The practice can be very misleading. For instance, a high proportion of prisoners are Māori, but some of them – we do not know how many – will have ticked other ethnic categories. (The good news is that the proportion of young Māori who are imprisoned is falling. See here and here.)

All the evidence is that ethnic Māori are a very diverse lot. I add to it, by reporting how they list-voted in the 2020 election. [1] Just over half of Māori descent choose to vote in general rather than Māori electoral seats. They are included in these figures which like all survey results are subject to sampling error):

2020 List voting by Māori.

(Percent Share of Total)

Labour 63.8

Green 7.7

National 7.5

Te Parti Māori 6.8

NZF 5.4

ACT 4.0

Other 4.8

We are not surprised that almost two-thirds of Māori voted for Labour (half the country did), but the rankings of the parties below them are intriguing. The Greens were second; National was above TPM. Altogether, around a fifth of Māori voters voted on the right.

(The 2023 electoral data are not available yet and will report different proportions. I had a very rough shot at estimating the numbers. Labour’s share may have collapsed by a third – most, probably, went to TPM who came second behind them. National may have won more votes than the Greens. ACT’s share may have gone down. I’ll let you know when the 2023 data becomes available.)

The voting data confirms all the other evidence. Māori political views are diverse. Yes, there may be less variation within the group than in the population as a whole, but anyone who says they speak on behalf of all Māori is deceiving themselves, while almost all generalisations about all Māori are wrong unless there are caveats (an exception is that Māori are diverse).

That does not mean there are no tendencies. One is that on almost every socio-economic indicator the Māori population averages worse than the non-Māori population. (That is also true for Pasifika.)

That difference is cited to justify targeting public social services to Māori. The logic is not obvious. For instance, Māori are more likely to be poor than non-Māori. But there are more non-Māori who are poor. Poverty measures which target Māori may support Māori who are not poor (there are more of them than those who are poor) and fail to address the non-Māori poor who are worse off than the average poor Māori.

There is the logic of the Coalition Government’s mainstreaming policies. They have much in their favour but there are caveats. The biggest is whether the government policies will actually address the need rather than just offer pious promises.

or example, the Coalition Government mainstreamed Māori healthcare by abolishing the Māori Health Authority, Te Aka Whai Ora. The public disliked the institution; there was little enthusiasm for it even among Labour Party voters. Perhaps it was a lightning rod for the dislike of the health sector redisorganisation, which abolished the local DHBs replacing them with the centralised Health New Zealand. But the Coalition Government seems to have no idea what it was going to do instead.

Simple mainstreaming does not work if one group in the community is sufficiently different to require different delivery. For instance, those living in rural areas may have difficulty accessing the services that urban dwellers do. What if some Māori feel intimidated by what they see as Pakeha-dominated institutions? That may not be just a Māori problem; it may be that all those with low educational attainment find our medical institutions overwhelming. The Māori middle class may approach a hospital with the same confidence as Pakeha middle class do.

One sort of argument is that Māori poverty arises from different causes. There is a trope that Māori poverty is the result of ‘colonialism’. Whenever I have followed the argument, I have foundered on what ‘colonialism’ means and how it works its way through to lower incomes. I find the term is rarely defined and its meaning can shift from article to article, chapter to chapter, page to page, even sentence to sentence.

I am not unsympathetic to the notion of colonialism as a way of explaining the history of the first peoples. Unquestionably, they were disturbed by the later arrivals. But we need to be clearer.

For instance, the Musket Wars were very disruptive – almost certainly causing poverty to some – to Māoridom, but there were few Europeans in the country at the time. As the name of the wars indicates, the intruders were the guns. Was that colonial?

The New Zealand Wars led to land confiscations – there were fewer than we remember, but it was the best quality land. However, I attribute more damage to the 1865 Native Lands Act and its successors which aimed to individualise land ownership. Not only did they forcibly reduce Māori possession of land, which was the basis of traditional Māori social organisation, but they led to conflict among and within hapu and iwi, which further undermined Māori social organisations. The individualisation would have happened anyway, but it would have been less destructive if it had been at pace determined by Māori.

The Māori economy largely thrived before 1870s. It began spluttering not only because of the loss of land, but because most Māori were living on land which was unsuitable for sheep, when wool and (later) frozen meat were the economic drivers of New Zealand. John Gould’s observation of different average incomes by iwi is explained by observing that higher-income Kai Tahu benefited from the sheep boom because the South Island soils were not compromised. The slogan that colonisation caused poverty implies there was less colonisation in the south.

For the next hundred years, most Māori struggled in rural areas with poorer public services in areas as wide ranging as education and health and infrastructure. They were very badly prepared for their urban migration which accelerated after 1950, having rural rather than urban skills and lacking capital resources. Their poverty became apparent.

Whether the account in the last few paragraphs can be summarised as ‘colonisation’, I leave others to develop. They identify key elements as to why many Māori are poorer today. The story is elaborated in my Not In Narrow Seas and some of my other writings. (e.g. here and here.) It concludes that the Māori poor lack educational, occupational and social skills, as do the non-Māori poor. A colonisation explanation explains poverty for only a quarter of the population – a little more if it is extended to Pasifika. It is neither a comprehensive account of why poverty exists in Aotearoa New Zealand nor does it provide a diagnosis for its treatment.

We cannot rule out that mainstreaming is a viable policy for supplying public services, providing it is culturally and socially sensitive. It need not be inherently anti-Māori, but it will be if it is done badly without commitment, because it will be anti-those-in-need, and proportionally more of them are Māori.

[1] The results are based upon data especially provided by Jack Vowles. It comes from the 2020 survey of the New Zealand Election Study research program. The surveyed numbers are small – just over 1000 – and subject to error – about as large as the standard political opinion poll. Thankyou, Jack.

Notes on the NZ Material Hardship Measures

This entry was posted in Distributional Economics, Statistics on 19th June 2024 by Brian Easton.

Since 2008 Statistics New Zealand has measured material hardship in households with seventeen questions in the Household Economic Survey. This note reports on my brief exploration.[1]

The Unit of Measurement

The hardship questions are asked of a household and responses are reported on that base. The data reported below is by individuals so a household of four appears four times in some of the data. The questions reflect the household as a whole rather than the individuals in it. For instance, children in households that are forgoing dental treatment may be receiving full treatment in the free dental service but their parents may report they are deferring their dental treatment.

More generally, the analysis should not be interpreted to imply that the hardship is shared equally in the household. This may not be true; for instance, parents – especially mothers – may make sacrifices to shield their children from some of the hardship rigours the household faces.

Children in this paper are under 18 years of age. It is possible that households distinguished by the different ages of their children may show different patterns.

The Household Economic Survey does not cover the 1.7 percent New Zealanders who do not live in households but in institutions such prisons or rest homes.

The data comes from the 2022/3 year. It is from a sample surveys and subject to sampling noise. The data from the elderly is less reliable than all people or children. The adult results reported below are inferred as residual after deducting the other categories. Adult parents assigned to households with children assume the same pattern for one- and two- adult households.

The Questions

Some remarks about the individual questions listed.

The questions are similar to those asked in overseas surveys. They have to be generally applicable to almost every household. Hence there are no questions on period poverty since it is not a potential issue in most households. Even so, some of the questions are not applicable to, say, a vegetarian household and are asked in a way which recognises this.

The Household Economic Survey collects information on income and expenditure and also asks a question on income adequacy.

‘I would like you to think about how well your (you and your partner’s combined) total income meets your everyday needs for such things as accommodation, food, clothing and other necessities. Would you say you have not enough money, only just enough money, enough money, or more than enough money ?’

There is also some data on housing quality (e.g., keeping warm, dampness and mould) and while there is no direct questions about overcrowding it is possible to make some assessment based on the Survey.

However, currently it has not been possible to link these responses to the hardship measures. It is regrettable that it has not been done. I do not blame the statisticians in the government service who are already working hard. The failure reflects the inadequacies of our social science research funding. I tried to get funding to do similar research forty years ago; funding accessibility in the poverty area has not got any better since.

One of the first things proper investigation is likely to do is develop better hardship measures. This paper makes a small (unfunded) contribution.

The survey has been mainly used for assessing deprivation among children. It does not reflect the pressures on the elderly; for instance it does not cover an elderly person who is on a waiting list for hip surgery because they cannot afford to go privately.

More generally, the questions being asked are almost entirely about day-to-day expenses (perhaps month-to-month given some of the payment cycles). They do not cover big occasional expenses – like hip surgery. An inability to meet them may generate as much daily deprivation as those covered by the survey. [2]

Ranking the Hardship Responses

The responses to the hardship questions are ranked here by the proportion of responses in the population which indicate hardship. (The order is hardly different if the household responses, rather than people responses, are used.)

The order is from most common to the least common. The ranking can be interpreted as follows:

The first thing a typical struggling household does is to give up routine dental care (22.7% of people live in households which are forgoing dental care because of cost pressures). Next, it exhausts all its savings so that it has no emergency reserve of even $500 (16.5% of people). At the bottom of the list of seventeen responses, the most desperate households go without meat and fish three or more days a week (1.6% of people).[3]

Table 1 shows the results for all those in households, for those in households with children, for those in households with at least one person over 65, and for other adults. [4]

I grouped the responses into three. The ‘hardship’ category is of the more common responses (1-6) of ‘moderate hardship’. There is a noticeable step down to ‘severe hardship’ (7-14). The bottom three responses (15-17) are a ‘very severe hardship’ category, although there is not same drop between 14 and 15 as there is between 6 and 7. This is to emphasise the five-fold difference between responses to question 7 and question 17.

Table 1. Ranking by Hardship Responses

<> Rank Household type People Children & Parents Elderly Adults only % % % % Hardship 1 Put off visits to dentists 22.7 28.0 12.0 21.2 2 Cannot afford unexpected $500 expense 16.5 22.1 9.0 13.3 3 Buy cheaper or less meat 15.8 20.8 9.0 13.0 4 Don’t have home contents insurance 13.9 18.0 7.0 12.2 5 Limited buying clothes/shoes 12.9 18.8 6.0 13.3 6 Cut back on local trips 12.2 16.0 6.6 10.2 Severe Hardship 7 Delay replacing/repairing appliances 8.2 11.5 3.4 6.3 8 Can’t borrow to meet costs 7.9 11.6 1.9 6.3 9 Put off doctor’s visits 7.4 9.8 2.1 6.8 10 Cannot pay utilities 6.0 10.3 1.9 2.7 11 Cannot buy fresh fruit or vegetables 5.9 7.6 2.5 5.2 12 Put up with feeling cold 5.8 6.7 3.1 5.9 13 Cannot pay for car 5.0 8.1 1.2 3.2 14 Unable to give gifts 4.7 5.7 3.3 4.1 Very Severe Hardship 15 Don’t have suitable clothes 3.0 4.2 1.1 2.4 16 Don’t have good shoes 2.0 2.9 0.4 1.6 17 Meals without meat, fish or chicken 1.6 1.7 0.6 1.7

Based on Responses to 2022/3 Household Economic Survey

The rankings for the sub-populations do not quite correspond to those for the total,. The differences may reflect sampling noise. Perhaps some can be explained by differences in living situations such as many of the elderly are unable to use or do not need to use a car.

There is a persistent pattern in which households with children show the highest responses to the deprivation questions and those with elderly the least.

Aggregating the Hardship Responses

Current practice (the Dep-17 score) is to add the number of hardship responses of each household, resulting in a categorical scale from 1 response to 12+ responses. We might assume that households make sacrifices in the same order. The generalisation seems to be roughly true in an aggregate tabulation, but I have yet to see a study which looks at individual households (that is, assesses how often there are exceptions to the rule). Hints in Table 4 below.

However, it is not obvious that each sacrifice is of equal weight. The relative weight could be assessed by a micro-analysis, although that would involve numerous heroic assumptions. Alternately, an aggregate approach would be to map responses against some external indicator. Possible indicators would be household income or, if they were recorded, the household’s or some independent observer’s assessment of the overall degree of hardship. (Mapping these hardship responses against income should result in much better household equivalence scales at the bottom of the income distribution instead of the current ones based on arbitrary judgements.)

Table 2. Scores of Hardship Responses

<> Some Hardship 1 Put off visits to dentists 1.00 2 Cannot afford unexpected $500 expense 1.38 3 Cannot buy cheaper or less meat 1.44 4 Limited buying clothes/shoes 1.77 5 Don’t have home contents insurance 1.63 6 Cut back on local trips 1.86 Severe Hardship 7 Delay replacing/repairing appliances 2.79 8 Cannot borrow to meet costs 2.87 9 Put off doctor’s visits 3.08 10 Cannot pay utilities 3.81 11 Cannot buy fresh fruit or vegetables 3.88 12 Put up feeling cold 3.93 13 Could not pay for car 4.51 14 Unable to give gifts 4.88 Very Severe Hardship 15 Don’t have suitable clothes 7.58 16 Don’t have good shoes 11.44 17 Meals without meat, fish or chicken 14.63 MEDIAN 3.08

Calculated from Table 1 as explained in text.

Not having either the data base nor the means to do this, I used a more heuristic index to aggregate the data. It sets the score for the most common hardship (putting off visits to the dentist) at 1.0 (unity). All other reported hardships are scored by their infrequency relative to the most common hardship. Thus going without meat, fish or chicken for three meals or meals a week which occurs as .068 times as often as putting off the dentist is scored at 14.63 (1/.068 = 14.63). The larger the score the less frequently the hardship occurs (and, presumably, the more onerous it is). Table 2 (previous page) shows the ranking.

Applying these scores to the various categories we get the following average hardship scores among households in hardship. (The scores may appear low because they include households which report no deprivation responses.)

Table 3. Average Hardship Scores.

People 3.9

Households with Children 5.3

Households with Elderly 1.7

Other Households 3.1

Calculated from Table 1 as explained in text.

Not surprisingly, households with children are in greater hardship than households without children.

The average responses weighted by score were much the same for each type of household, so Table 4 shows only those for all people are shown here.

Table 4. Average Hardship Scores by Numbers of Household Hardships

<> Responses People Min score Ratios 1 1.8 1.0 1.78 2 4.1 2.4 1.72 3 6.7 3.8 1.77 4 9.5 5.4 1.74 5 12.7 7.2 1.76 6 15.9 9.1 1.75 7 18.8 11.9 1.58 8 21.9 14.7 1.49 9 28.2 17.8 1.58 10 30.3 21.6 1.40 11 34.9 25.5 1.37 12+ 46.9 29.4+

Calculated from Table 1 as explained in text.

The result is not surprising. The people scores rise with increased number of hardship responses, rising at a near constant rate of 3.3 points between those households which report 1 hardship response and those which report 8 hardship responses. However the change from 8 responses to 9 responses exceeds 6 points which is a much bigger jump. The change is large enough to suggest that households with 9 or more hardship responses are struggling markedly harder than those below. Inspection shows that 9 is about the stage when households more frequently begin to cut back on eating meat, fish and chicken.

The conventional measure of household hardship is those households with 6 or more hardship responses. That is a judgement. It is not evident from this data that 6 is a more appropriate division than, say, 5 or 7. (Among those living in households with 6 or more hardship responses are about 145,000 children. A BHC50 income poverty line has about 150,000 children in households living below it. If there were an exact mapping we might equate the two as the same ‘poverty point’.)

The third column in Table 3 shows the lowest possible score for each category. For instance, the lowest possible score for households with only one hardship response would be 1.0. However only 31 percent of those households put off dental visits. Some have instead insufficient savings to meet an unexpected expense (14%), or have no home contents insurance (12%), or buy less or cheaper meat (12%) and so on. In the fourth column is the ratio of the reported scores with the lowest possible score. It comes to 1.8 giving some indication of the variation of choices.

(There is no judgement of poor housekeeping from this ratio. It is the result of household decisions reflecting their priorities and judgements. It is also possible that the household thought it easier to run down its savings and buy cheaper or less meat than give up a dentist, thereby ending up among the two-hardship-response households.)

For low hardship response households the ratio up to 6 hovers in the 1.7-1.8 range. For households in higher hardship, the ratio begins falling off, indicating that those households which are suffering greater hardship increasingly take the same measures.

Conclusions

There are no unexpected insights in this note. Its purpose was to consolidated my understandings of households which are economically struggling and quantified some of the magnitudes.

The tabulations confirm that on average households with children experience the most deprivation on these measures, although there are also other households which are struggling. Households with elderly in them appear to be struggling least, presumably as a consequences of the universal minimum income regime for the elderly.

However, the 17 questions do not cover some important dimensions of deprivation – especially housing. Nor do they deal with occasional but big expenditures without which there can be considerable hardship.

More generally, the paper shows that a scaling of responses rather than just counting of them provides some useful insights. The scale used here is not the best potentially available – it was that which could be derived from the available data. The construction of an even more rigorous scale and then linking it to household income would seem to be a priority for advancing the use of the data.

Endnotes

[1] I am grateful for help from Ryan Sutcliffe and Michelle Feyen of Statistics NZ who are not responsible for any opinions or errors.

[2] Because such expenses are infrequent the Household Survey is not really suitable to investigate them.

[3] That portion excludes those dieting or vegetarians and the like.

[4] The estimates for other households without children (i.e. adults only) are not direct but calculated by subtracting household with children and the elderly from the entire population.

Coalition Of The Unwilling?

This entry was posted in Macroeconomics & Money, Political Economy & History, Pundit on 14th June 2024 by Brian Easton.

What does Budget 2024 tell us about the current government? Muddle on?

Coalition governments are not new. About 50 percent of the time since the first MMP election, there has been a minority government, usually with allied parties holding ministerial portfolios outside cabinets. For 10 percent of the time there was a majority government and for the remaining 40 percent it has been a coalition government. Even a coalition of three parties is not entirely new. The last term of the Clark-Cullen Government involved three – even four – parties although there were only two in the cabinet with the others holding portfolios outside.

Even so, the Luxon-led one of three parties in the same cabinet is unusual (although every government is unusual). It involves three parties, two of which – ACT and NZF – are strongly ideologically opposed. Winston Peters, from the centre-right of the National Party has explicitly said he wants to stop neoliberalism; David Seymour, on the Party’s extreme neoliberal right, has been only a little more diplomatic about NZF.

Others will write of the resulting political tensions, but as someone who writes about the government’s economic and other policies, I have to take into consideration ideological positions.

While the differences are evident in the way the parties are handling their individual portfolio, the annual budget is a whole-of-government operation which has practical consequences and is not just ethereal aspirations.

So I was hoping that Budget 2024 might shed some light on the political tensions between the wing parties and also those within the National caucus, which contains economics predilections of both the centre right and the neoliberal kind.

To my surprise, the tensions were not that evident in budget. Both ACT and NZF had big expenditure outlays and both seem to have agreed on the government spending cuts but preferably not in the portfolios they hold (although who knows what one day may be leaked to the parliamentary gossips). Both supported mild tax cuts – and some tax hikes – and an increase in government borrowing. Neither seem to have vetoed the other’s ambitions (ACT did want a different tax regime from National’s, but the Minister of Finance pointed out the proposal was impractical given the budget financing constraints.)

There are economic policy commonalities. All three parties are committed to spending big on law and order. The impression is they are all less committed to environmental protection and addressing climate change. (I don’t think they are predominately deniers; climate change mitigation is just low among their priorities.)

They are also agreed on ‘mainstreaming’ policy towards Māori socio-economic disability. To summarise, they are not denying there are serious health and poverty problems among many Māori. But they recognise there is similar distress among non-Māori and there are, numerically but not proportionally, more non-Māori suffering it. (A caveat is that the Pasifika proportions are similar to Māori ones.)

Mainstreaming targets all the distress irrespective of ethnicity rather than prioritising Māori and paying less attention to non-Māori. It is a strategy which deserves exploring but that requires more space than is available in this column.

I do not know where these inequality and poverty issues rank in the Coalition priority list. One journalist flummoxed the poverty issue during the budget lockdown by pointing out to the Minister of Finance that the (rather thin) child poverty report predicted there would be no reductions in child poverty in the next few years. (We are drifting further and further away from the targets set in the aspirational 2018 Child Poverty Reduction Act.) The Minister replied that the budget was increasing the incomes of families further up the distribution. The journalist – perhaps because he did not know enough – did not follow up with the obvious point that if incomes were rising in the middle but not at the bottom then inequality was increasing. Was that the government’s intentions? We have no idea how the Minister might have responded. Perhaps she would have smilingly flannelled.

We are left wondering what the Coalition Government’s strategy towards inequality will be. Neoliberal thinking does not focus on it. The centre-right gives it some significance – hence the interest in social investment (that is another column too). Inequality did not figure strongly in the Key-English Government’s thinking, although it did give additional support to families. However, by indexing social security benefits to prices and not to wages or general incomes – a policy which has just been reinstated – income inequality grew a little during its time. My guess is that this government will be much the same; certainly, it will pursue the reduction of child poverty even less vigorously than the Ardern-Hipkins Government did.

The big difference between the economic stances of the two flank parties is illustrated by the $1.2b set aside over three years for Shane Jones’s Regional Infrastructure Fund, while David Seymour has $47m over four years for his Ministry of Regulation. (In contrast, National got $5m for one year to establish a National Infrastructure Agency.)

Each was a part of a coalition agreement but they reflect quite different visions of how to run the economy. The NZF initiative comes from the highly interventionist approach which dominated economic policy in the first four decades after the Second World War. The ACT approach is an extension of the anti-interventionist approach which Roger Douglas and Ruth Richardson instigated and which has dominated economic policy in a milder form since.

I am not sure how the two approaches will be reconciled and I suspect that neither Chris Luxon nor Nicola Willis know either. Seymour will not have a lot of firepower against Jones until he has an operational ministry advising him. Perhaps the first great political conflict will be resolving the detailed powers in the Fast Track Approvals Bill, which currently gives considerable power to ministers in the great interventionist policy tradition.

Deeper, there may be a commonality in that both parties are prioritising GDP growth and profit (which is a signal for it) over wellbeing and sustainability. (This is a pro-business coalition.) Whether that reflects the majority of the public I cannot say, nor whether the strategy will be successful in the long run.

In the short run we are seeing the Coalition Government announcing much new policy as on-the-hoof response to political pressures and its mistakes. It is a muddle-on strategy, isn’t it? Much like Budget 2024. Promises were made in opposition. Some were quickly implemented in the first hundred days, not always mindful of the long-term implications. Those implications are beginning to shape the Coalition Government, rather than it leading the shaping.

The 2024 Budget Forecasts Are Gloomy About The Next Three Years.

This entry was posted in Macroeconomics & Money, Pundit on 7th June 2024 by Brian Easton.

There was no less razzamatazz about the 2024 Budget than about earlier ones. Once again the underlying economic analysis got lost. It deserves more attention.

Just to remind you, the Budget Economic and Fiscal Update (BEFU), is the Treasury’s independent assessment and so can be analysed by other competent economists (although they may disagree with the underlying assumptions).

Moreover, the Treasury economists will be keen to get their forecasts right. Their changes between the September 2023 Pre-election Economic and Fiscal Update (PREFU) and the May 2024 BEFU are the consequence of new evidence, not a change of political leadership. If the new minister gives a direction – as Nicola Willis did over the debt target – the Treasury reports the change and provides sufficient information for the analyst to trace its effect. In summary, EFUs are not politicians’ documents, but professional economists’ ones.

I am going to compare the May 2024 BEFU with the September 2023 PREFU because the earlier forecast is what the National Opposition had when it made the political commitments that have shaped their economic policy decisions in government. (Treasury always provides detailed comparisons with its previous forecast; in this case the December 2023 Half Year EFU (HYEFU).)

As reported in an earlier column, there had been much bad economics news coming in. That is reflected in the revising of the economic forecasts. PREFU23 expected a stagnation in the economy from (June year) 2023 to the middle of 2025. The Treasury forecast in BEFU24 rolls that trend out another 18 odd months to end 2026. The politically alert will observe that that means the Coalition Government is expected to be in charge of a stagnating economy for its entire first term. (In my judgement this is not particularly the fault of this government nor of the previous one.)

Let me tell you a secret about economic forecasters. They sweat to get their forecasts of the next six or so quarters as right as they can. Further out, they relax a little and tend to be more optimistic than perhaps is warranted. We all do. Pressed, I think we’d say something like, ‘the forecasting fan is getting wide the further out we go. There are so many uncertainties. So don’t take the forecast precisely; it is there to help you think about the future’. I would add ‘yep probably we are too optimistic – that is the human condition’. The EFUs offer upside and downside alternative forecasts; I take more notice of the downsides.

BEFU24 nicely illustrates this with the discussion on its productivity assumptions. I remember looking at an earlier EFU and thinking the productivity growth assumptions seemed high. There has been hardly any growth for ten years, although the Covid era data jumps around a bit. BEFU23 assumed that productivity growth would return to the growing pre-2012 trend. I wondered what Treasury knew that I didn’t.

The productivity trend does not affect short-term forecasts too much but it matters increasingly further out. Since the BEFU23 forecast productivity has remained stagnant. In response BEFU24 has a productivity track more like the stagnation of the last decade. The one-page discussion is worth reading because it probably summarises a vigorous internal discussion. (Good on Treasury for having one.) The lowering of the productivity track adds to the gloomy prognosis.

A key purpose for Treasury forecasts is to get a good estimate of tax revenue which affects the size of the government deficit and the borrowing program. The poorer expected performance of the economy between PREFU23 and BEFU24 lowered expected tax revenue by about 3 percent or $16.6b in the four years from 2023/4 to 2026/7.

The Coalition Government’s tax changes reduced revenue by another $7.6b (net). The bulk of those reductions represented promises made in opposition when PREFU23 reflected the understanding of the economy. So the incoming government faced a far bigger challenge than it expected, especially as the new Minister of Finance promised to resign if she did not implement her promised income tax cuts.

She said that she would fund them without increased borrowing. Not true. PREFU23 forecast net debt at $190b in June 2027. The BEFU24 forecast is $205b. Some of the loss of revenue has been clawed back by cutting government spending, but the net debt is $15b higher. It is arithmetically reasonable to say that the tax cuts are paid for from additional borrowing.

The Minister presented a table which purported to show that her tax cuts are not being funded by higher borrowing. For an accountant the tabulation is specious because it divides the financial transactions into separate accounts. It’s a bit like saying ‘I’ve paid for the overseas trip out of household income, but I’ve had to borrow to pay for the groceries’.

There amounts to a further accounting trick to keep the projected borrowing down. A private-sector forecaster will try to assess further future expenditure such as election promises not yet implemented (such as the expenditure on cancer drugs), spending to meet the unexpected (such as damage from natural catastrophes) and the effect of new and revised policy development (I would be making an allowance for the likelihood of some expenditure cuts becoming unstuck; I shan’t be surprised if they discover implementing their ‘social investment’ proposals proves very expensive in the short term).

The Treasury forecasts only future spending which has been agreed by cabinet. However, it includes a contingency ‘operating allowance’ for potential spending. It amounted to $9.75b for the three years to 2026/7 in PREFU23 but only $7.2b in BEFU24. That reduces the projected June 2027 debt level by over $2.5b.

Treasury is nervous about the projected operating allowance, warning that it will be difficult to keep within the allocated amount. The Minister’s response is that she will be making more spending cuts. They will add to the pain of the last round of cuts and while smaller will in some ways be harder, since the easier ones have been made.

In summary, the Coalition Government has already used up what first-term room it had in the economy. Its tax cuts amount to a free cup of coffee once a fortnight to a Superannuitant. Free beer will have to wait until after the 2026 election. The politics of BEFU24’s economic strategy belongs to the next column.

The Taxpayers’ Union At Eleven

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History, Pundit on 31st May 2024 by Brian Easton.

How to run a successful pressure group.

In 2013 a group of idealists, led by Jordan Williams and David Farrar, established the Taxpayers’ Union. To celebrate its first decade as surely New Zealand’s most successful political pressure group NZTU published The Mission: The Taxpayers Union at 10, ten short interviews (by David Cohen) of people associated with the group with a foreword by Bill English.

The NZTU describes its mission as:

‘seek[ing] lower taxes and value for money from every tax dollar.

We promote sensible restraint of government expenditure by:

Scrutinising government spending;

Publicising government waste;

Arguing for an end to corporate and union welfare; and

Promoting an efficient tax system.’

It has had numerous successful campaigns. National cabinet minister Hekia Parata, knocked back a proposal from her officials saying, ‘I can’t approve this spending – what if the Taxpayers’ Union found out?’ Certainly the NZTU has identified many expenditure programs of both National and Labour Government which seemed wasteful (or worse).

Its reach has been even greater. There are alumni of the NZTU throughout the current government including New Zealand First cabinet minister Casey Costello, who was a chairperson and board member. (She was also a joint founder of Hobson’s Choice.) The son of the NZTU’s first chairperson is Chris Bishop, a senior cabinet minister. The prime minister’s office includes an economic adviser who previously worked for the NZTU. The list can go on. (It has interns, typically university students, who go into political activities elsewhere.)

By New Zealand standards it is a big pressure-group organisation. Williams described the NZTU as having ‘18 on the union’s payroll’. It must be an expensive operation. You will recall that during the month-or-so 2020 Covid lockdown the NZTU accepted a $60,000-plus wage subsidy from the government because donations had fallen off. It explained that ‘we have stated on the record that we would never accept taxpayer funding’. They reversed their position, because they believed ‘the welfare of our employees to be a more pressing immediate concern than ideological purity’. Good that staff wellbeing was more important than ideological purity – the approach of pragmatic social democracy. (The grant was repaid so it became in effect an interest-free loan, which the NZTU does not approve of either.)

It says the major source of its funding is from members’ donations, claiming 200,000 members which may be more than the membership of all the political parties together. (National last had 200,000 members in 1980; the trade union movement has about 400,000 members.) The annual subscription is $25 but it receives larger donations. (The book mentions a $15,000 one.) The NZTU claims corporate donations are tiny but is a bit fuzzy about contra-deals where business interests provide free services – such as the expenses of going to an overseas conference where NZTU and the business interests align.

Economics has an elaborate theory of taxation which seems to have passed it by. For instance, its position to reduce tobacco excise is crude. (Why is it not more vigorous over alcohol excise?) There is an economic case based on a particular ethical framework that it is too high – you may not agree with it – but there is no hint the NZTU is aware of the case. Admittedly, its simple message has more impact in the public arena. As a general rule its public relations have been impressive.

In contrast, the (neoliberal) New Zealand Initiative has much more economic firepower (although you may not agree with how it is applied). There is not much in the book about the two organisations’ relationship, except a mention of NZI as a corporate-funded equivalent. In contrast, the NZTU is open about having formed the Free Speech Union which has an office next door.

Where does it sit on the political spectrum? Clearly it is on the right and there are hints of an alignment with National, although it feels free to criticise National Governments – Bill English winces when he relates some of the complaints when he was a minister.

My initial response on reading the book was that it was presenting itself on the pragmatic political centre-right. However, on the four-member board there is Ruth Richardson, John Boscawen a former ACT deputy leader, and Chris Milne, a former ACT Party Parliamentary Chief of Staff. The NZTU does not appear to produce reports – it campaigns. But the podcasts in its ‘taxpayer talk’ are dominated by neoliberals. I leave you to judge to what extent the pressure group is a front for ACT and its ideology.

Whatever, it is a very successful pressure group and its message dominates public policy. The recent Labour Government was unwilling to challenge it by introducing new taxes, even if they were popular in the party. On the other hand that government appears to have presided over much wasteful expenditure, not least indicated by most government departments having found it relatively easy to make major spending cuts. Seeking out that waste has been a key element in giving the NZTU so much public authority.

The NZTU’s low-taxation logic leads to advocating a minimalist welfare state, thereby rejecting the welfare state conceived by the First Labour Government. Not surprisingly, it objected strongly to Labour’s proposed unemployment insurance scheme, development of which was withdrawn because of public pressure.

In contrast, the equivalent pressure groups on the left are hardly effective. In terms of the public debate, it’s a no contest. The Helen Clark Foundation seems uninterested in economic policy. (Perhaps there should also be a Michael Cullen Foundation.) There is a Fabian Society which provides lectures but has no paid secretariat. As far as I know, neither has codified their rather woolly objectives into a program as concrete as the NZTU’s. (There is a bit of economic firepower at the NZCTU.)

The level of taxation determines the balance between the public and private sectors. The NZTU favours a smaller public one and a larger private one. That is a policy choice. I’m not sure that it is the majority of the public’s choice. The NZTU may have won policy minds but has it won the public’s hearts?