The Best Deal: How Should We Deal with Monopolies?

This entry was posted in Business & Finance, Listener on by .

Listener 22 February, 2003.

Keywords: Business & Finance;

Economists have an ambiguous stance towards monopolies. Is the advantage of being one ‘the quiet life’ (John Hicks) or are they the key to technological innovation (Joseph Schumpeter)? Are the profits they make unfair, or is the problem that they distort the price system? There is a sort of compromise in the view that all businesses seek to be a monopoly, but the competitive process frustrates them. But what steps have to be taken to make sure the competitive process works?

Until the 1980s New Zealand regulated monopolies by a creaky and hardly comprehensive pro-competition legislation, various interventions – most notably price controls, and the public ownership of many of the most prominent monopolies. The view was that often the New Zealand market was so small that a monopoly was inevitable, and any misbehaviour could be resolved by public control.

As a part of reforms of the 1980s, many of the public monopolies were sold off (sometime without any consideration of the competition implications), the interventions were abandoned (with particular attention to removing of artificial barriers to entry) although there remains reserve powers of price controls, and the legislation was replaced by the Commerce Act of 1986.

There was a concerted attempt to neuter the effectiveness of the anti-monopoly provisions of the Act, led by the Business Roundtable which, like an Orwellian pig, grunted ‘public monopoly bad, private monopoly good’, a view based on that there is no need for public intervention because private monopolies are undermined in the long run by technical change. Most economists would broadly agree with the latter proposition, but observe the opportunities for profit and distortion in the medium run are substantial.

There were further attempts in the 1990s. The most outrageous proposal was that anti-competitive mergers should be allowed if they increased efficiency. Every economist knows ‘efficiency’ is difficult to define conceptually, is even more difficult to measure, and that merging companies would promise efficiency improvements which they would not deliver (already a common – and repeatedly broken – promise to shareholders during takeovers). The effect of the proposal would have been to allow virtually all mergers, whatever the public interest.

The New Zealand competitions regime is described as ‘light-handed’ regulation. Basically it involves the removal of all barriers to entry by potential competitors and a reliance on the competitive process unless outcomes are really disastrous. The approach’s strength is that it requires little intervention from the government, so does not have to second guess business.

Its weakness became increasingly apparent in the 1990s (notably from the continuous litigation between Telecom and other telecommunication providers). The most obvious problem is the ‘natural monopoly’ or ‘common carrier’ where market and technological conditions are such that there is only one room for a provider. There is only one phone or electricity line to a house, and each region is likely to have only one port or airport. Because New Zealand’s market is small, natural monopoly type situations probably occur here more than in the economies we try to imitate.

Since 1999 the government has addressed various specific issues with changes in the electricity industry legislation and the introduction of a telecommunications commissioner, while price controls have been proposed for some airports.

But the problem is not confined to lines and ports. Consider the Air New Zealand-Qantas merger. It appears that the domestic air travel system means that there will be one dominant provider. Any other airline is marginal (and perhaps, as in the case of Ansette, unprofitable). The effect of the merger may increase that dominance, and make alternate provision even less attractive. (The same story – perhaps less strongly – may apply to Trans-Tasman and long haul routes from New Zealand.) However the Commerce Commission may allow a merger if it considers the detriment from the loss of competition is outweighed by other public benefits.

But it is also possible the Commission may disallow the merger even though there are considerable public benefits, because our light handed regulatory regime cannot deal with natural monopolies. For instance, it may be that some sort of price control may protect the public from rapacious charging of a dominant corporation in one market, while allowing the capturing the public benefits in others.

In the case of the creation of Fonterra, the government seems to have decided that the Commerce Act would prohibit the merger of the two big dairy companies and the Dairy Board. So it passed legislation overriding the act. That is a perfectly acceptable approach – in the end only the government can decide on major public interest issues – but it was not part of a comprehensive policy framework. As more opportunities for potentially beneficial monopolies arise we are likely to end up with a pragmatic, but Heath Robinson, approach to their regulation, rather than a coherent one which gets the best deal for New Zealand.

Competition and Monopoly: Index

This entry was posted in Business & Finance, Index on by .

Highly Concentrated (February 1981)
The Stock and Station Agent Industry (November 1995, but originally written in 1986)
The Public Interest in Competition Policy (October 1989)
Risking Dialogue: Electricity Outages Show How Consumers Are Powerless (August 1998)
Electric Rhetoric: Sneering Instead of Thinking (July 1999)
The Air New Zealand-QANTAS Merger: An Application in the Public Interest? (December 2002 )
Waccy Economics: Are there clear rules governing government investment? (September 2003)
*************
Footnote for Listener 13 March 1999

It was Watties

Twenty-five years ago a colleague, Tony Rayner (now, alas, dead), received a letter from a large New Zealand corporation complaining that he had described them as a “monopoly” in a first year economics lecture. We were not concerned by the reporting – lectures are public events, although students must distinguish between the presentation of an argument and the presenter’s views. We were aghast because surely Watties was a monopolist.

About the same time, Watties took on a young accountant, David Irving, who eventually rose to chief executive, retired, and has just written (with Kerr Inkson) a book about his time with the firm. The book, It Must Be Watties, reports Irving’s view that the company was indeed a national monopoly then. It goes on to describes the travails that the firm went through, as the economy opened up and firms became subject to the pressures of competition, here and in its new export markets. Eventually, intensely nationalist Watties was taken over by the giant transnational Heinz, which previously had been its main competitor. For those interested in the impact of market liberalisation, this business history is a must-read.

Abstract Of Research Proposal for Marsden Fund Application 14 February, 2003.

This entry was posted in Globalisation & Trade on by .

Diminishing Distance: New Zealand in a Globalising World

Keywords: Globalisation & Trade;

Globalisation is the greatest challenge that economies and nations in the world economy face today. It impacts on where people can work and live, what jobs are available, where investment occurs, and the ability of the nation state to control its destiny – the very foundations of nationhood. It generates both prosperity and disruption, with an uneven impact. Globalisation is not new. It was as significant – some argue moreso – in the nineteenth century international economy. New Zealand is a response to that globalisation, and its destiny is intimately tied in with future globalisation.

There is a plethora of studies on the globalisation but very few attempt to define and study it in any rigorous analytic way. Instead, they usually accept some phenomena, policies, or institutions a fact and write about their implications. Why these phenomena occur are rarely considered. Instead this research proposal is premised on an analytic foundation that globalisation is the consequence of reductions in the costs of distance. Falling transport and related costs change where industry can function and where people can live. Their effects are reinforced by economies of scale (the increased market from lower distance costs enables the reaping of falling costs as production scale increases, and the concentration of production in fewer plants) and increased factor mobility (an increased ease with which capital, labour and technology can relocate itself geographically).

The intellectual novelty of this research proposal – the extraordinarily powerful analytic insight – is that there is an analytic analogy between the impacts of the costs of distance and the impact of tariffs, so that standard international trade theory can be modified (apparently with little loss of generality) to provide the foundation for analysis. However, advanced versions of the models are necessary. As well as incorporating economies of scale and factor mobility income, distributional implications have to be addressed, as does intra-industry trade (the same product is exported and imported between two countries as when Germans but Renaults and the French buy Volkswagens – about a quarter of world trade today is IIT, up from almost nothing 50 years ago). Recent research shows under these more general conditions, outcomes such as the location of industry between different nations may not be as determinant as in the traditional international trade models. (This has the very important policy implications of to what extent – and how – can a country exploit this indeterminism to its own benefit?)

Additionally, in the last decade economists have given increasing attention to institutional frameworks (such a laws) and common understandings (such as social trust) at the national level. This perspective extends to their international equivalents such as the IMF and the WTO, albeit they are early (and not always just and democratic) ones. Thus the analytic foundations provide the basis for the issues which are the popular concerns. It is possible that those foundations will also assist understanding of some non-economic phenomenon such as international diplomacy and military activities. Cultural impact is another dimension (the applicant has one paper accepted for publication on this topic), as is nationalism and ethnicity.

The project will publish further learned articles building on past work and contribute to public debate. However, the long run intention is to produce a book, tentatively titled Diminishing Distance: New Zealand in a Globalising World. Although the orientation for an international audience may result in a lower profile on New Zealand, the work will be continually informed by the particular perspective of New Zealand (whose experiences are especially illustrative of the globalisation phenomenon), together with the rigorous use of the underlying theoretical models.

The proposed structure of the book (which gives an indication of the research program and its coverage) is Part I: introduction; Part II: nineteenth and twentieth century globalisation; Part III: trade; Part IV: capital, investment, finance; Part V: labour mobility, diasporas, nationalism; Part VI: technology; Part VII: distributional issues; Part VIII: national sovereignty, taxation, regulation, policy independence (illustrated by the future of the welfare state); Part IX: supra-nationality, the future of sovereignty; Part X: responses – from national, community, and individual perspectives.

The Washington Consensus: When Facts Get in the Way Of Economic Orthodoxies

This entry was posted in Globalisation & Trade, Growth & Innovation, Listener, Macroeconomics & Money on by .

Listener 8 February, 2003.

Keywords: Globalisation & Trade; Growth & Innovation; Macroeconomics & Money;

Overseas economists visit New Zealand regularly, seeing politicians, officials, business people, and even independent commentators. One, late last year, began his session with me, by saying that New Zealand’s economic relativity in the OECD had deteriorated throughout the last half century. The government wanted to accelerate our economic growth, he said ,but since coming to office it had
– delayed unilateral tariff cuts;
– raised income tax rates;
– ruled out further privatisation;
– toughened regulation;
– introduced a more active industrial policy ;
– re-regulated the labour market.
He concluded that he did not see a single policy change which would contribute to increasing economic growth.

You will recognise his critique as an unreconstructed ‘Washington Consensus’ position, formulated in the early 1990s (although advocated earlier), that economic growth would be promoted by free trade, low taxes, privatisation, market de-regulation, a non-interventionist industrial policy and a ‘free’ labour market.

I could have responded that there was no agreement that the policies he was advocating were beneficial to economic growth citing, for instance, Joseph Stiglitz’s Globalisation and its Discontents. The book has been a cause celebre because of its accusation that the IMF and the US Treasury have acted as agents for the US financial community, using their financial power to enforce (Washington Consensus type) policies which, Stiglitz says, are often to the detriment of the countries they are meant to be helping. I was more intrigued with the book’s bemusement about how these policies are not based on sound economic theory. In part it is because Stiglitz pioneered these theories – he was awarded a Nobel prize for some of his insights – and one cannot expect ordinary economists to be up with the latest developments. (Keynes famously said ‘in the field of economics and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age’, and there is a further lag when their teachers and other sources are behind the frontier too.)

But rather than arguing the theoretical deficiencies of the Washington Consensus (based on an extreme version of theories almost forty years old, but ideologically attractive to the powerful financial community) I pointed out that it was not true that there had been a continuous economic deterioration in the post-war era. For about two thirds of the period the New Zealand economy grew at the same average rate as the rest of the OECD (perhaps a fraction faster). There were just two periods when we grew markedly slower. One was the decade after the collapse of the international wool price in 1966, in the days when wool was so important that economic performance would inevitably suffer. The other period of disastrous economic performance was from 1985 to 1993 when New Zealand was implementing policies which would be called ‘the Washington Consensus’. So even were the visiting economist’s policy framework not theoretically flawed, the empirical evidence said they did not work when they were applied to New Zealand a decade ago..

I could not help wondering whether he had not been challenged earlier, because the numerous New Zealand economists to whom the visitor had already spoken were sympathetic to his analysis, despite its theoretical and empirical contradictions. There may not be a lot of support in the New Zealand economics community for the government’s policies. Too many were committed to the past policies – they are over thirty, or were trained by those so committed.

In fact, the list exaggerates the change in the government’s policies, for the reversals are small compared to the radicalism of the 1980s. This partly reflects that many of the 1980s changes made good economic sense – as indeed Stiglitz would argue. It was the ideological and obsessive extremism that was so damaging. But it also reflects that this government is cautious, not only because MMP encourages incremental rather than radical government but because its Labour predecessor of the 1980s instituted extremist policies and made a terrible mess. And in truth the government is not sure what will work – even though it is sure the Washington Consensus will not. Perhaps the marker of the government’s approach is that last year’s business leader’s conference was dominated by producers, with very few from the financial sector – a dramatic change from the last two decades, despite the increasing power of finance here too. (It helps that the government accounts are running a financial surplus and do not have to borrow from financiers.)

About the same time, the Director-General of the far more pragmatic OECD gave a public address on the way through. He looked at our economic policies and said they were all good or very good – better than the OECD average. Of course their implementation could be improved, but he concluded by saying he did not know what else to advise to accelerate the New Zealand economic growth rate.

How Representative Of Inflation Are Changes in the CPI?

This entry was posted in Macroeconomics & Money, Statistics on by .

DRAFT: Comments welcome. (The origins of this paper are evident in the text, but its stimulus was a question arising from the interpretation of a standard textbook on international trade.)
The paper was revised in April 2003.

Keywords: Globalisation & Trade; Macroeconomics & Money; Statistics

Over a decade ago I investigated to what extent the CPI could be used to represent the prices of the economy of the whole (GDP), as a part of the study which led eventually to In Stormy Seas. In the process of reducing the vast quantity of material that was produced into the book for publication, the material was left out. (The first draft of the book was about twice as long.)

I must have thought the issue as a methodological curiosum at the time, but since the book’s publication on a number of occasion during public discussions I have wished the material had been publically available. As the next section explains, the section was an illustration of one of the general issues with which In Stormy Seas was concerned, and it is also – as a later section explains – crucial to the understanding how monetary policy works, and how the current management regime may inhibit economic growth.

Prices in the Macro-economy

It is common for an economic exposition to posit the existence of a ‘price level’ (usually designated by ‘P’) which, if any consideration is given to its definition and measurement, is defined as the cost of a representative basket of goods and services. Little attention is given to what might be in the basket, as if it hardly matters. This paper shows it does.

I illustrate this (and other parts of the) conventional wisdom and another points from International Economics: Theory and Policy (5ed) by Paul Krugman’s and Maurice Obstfield. The choice is because it is one of the standard – centre of the paradigm – textbooks rather than because it is particularly remiss. The text first uses an aggregate price measure on page 34 introducing is simply as ‘any price of manufactures PM’ in a microeconomic context. The macroeconomics begins from Chapter 12, and the first reference to an economy wide price index may be on page 340 where the definition of the real rate of return includes ‘measuring asset values in terms of some broad representative basket of products that savers regularly purchase’. On page 367 the aggregate demand for money is introduced with one of the ‘three main factors’ determining it as

The Price Level. The economy’s price level is the price of a broad reference basket of goods and services in terms of currency. If the price level rises, individual households and firms must spend more money than before to purchase their usual weekly baskets of goods and services. To maintain the same level of liquidity as before the price level increase, they will therefore have to hold more money.

Households and firms face different ‘baskets of goods and services’ – conceptually different because households are spending while firms are producing. Yet the textbook draws no attention to the issues.)

They textbook then expresses – quite orthodoxly – the aggregate demand for money as

Md = P X L(r.Y)

with no further attention paid to the choice of P, the price level.

This, as we shall, see becomes important later in the text. Because the ratio Md/P is effectively fixed, various key results are controlled by it.

That there is a stable demand for money equation is not being disputed here. At issue is what is the appropriate price variable in the equation. Econometric estimates of the equation, based on a particular P (and also the particular definition of money, M) are subject to a random error (if not econometric bias), which in part might be due to the wrong choice of price index (and issue further complicated by multicollinearity among the explanatory variables). Moreover the size of the random error (let alone the potential bias) is usually sufficient to make the equation of little value for forecasting GDP (‘Y’ in the above equation: ‘r’ is the interest rate), an error large enough to make a difference to the growth path.

In contrast, In Stormy Seas pointed out that price relativities have varied considerably between sectors, and that at least six different sectors were necessary to describe the behaviour of the New Zealand economy over the last fifty years (pastoral products; energy; other exportables; importables; private non-tradeables; government services). Since the prices of these moved differently it followed that different baskets – that is with different proportions of goods and services from each sector – would reflect different price levels and movements in price levels.

The ‘one-price’ level characterisation of the economy is widespread. In effect the economy is assumed to consist only of a single commodity. For short term macro-economic forecasting this assumption is usually satisfactory, but it rarely makes sense in terms of the medium run economy. Indeed, the assumption is inadequate as it fails to explain one of the most important characteristics of the New Zealand economy – its participation in international trade. In that sense, international economics texts which rely heavily on a single measure of the price level (such as Krugman and Obstfeld) miss the whole point of open economies. Why does a one commodity economy need to import (and export), since apparently the same (composite) commodity is imported (and exported)? Heuristically one might assume a rigid price equivalence between the exports and imports (that is assume that the terms of trade are fixed), and between the tradeables and non-tradeables (that is assume that the real exchange rate is fixed). But that means that the international economics textbook is unable to explain what happens when such relativities change – and thus unable to explain the central experiences of a small open multi-sectoral economy such as New Zealand.

Moreover, the single commodity assumption in economics teaching models is as almost as pernicious as it is widespread. Far too much policy and analysis unconsciously assumes that there is no problem over the choice of the measure to reflect the aggregate price level, and so even more unconsciously it assumes that relative price changes are unimportant in long run economic performance. This is not true for relativities over which New Zealand policy has little practical influence (such as the terms of trade). They have despite their having an integral impact on the growth performance. Even more insidiously, it is not true for relativities over which New Zealand has some influence (most importantly the real exchange rate). If they are either ignored or analysed at a such a simplistic level that the policy conclusions are valueless.

Are Changes in Price Relativities Significant?

In Stormy Seas draws attention to substantial variations in
– the relative price of pastoral exports to imports (the pastoral terms of trade, pp.77-81);
– the relative price of energy relative to production prices (pp.158-160);
– the relative price tradeables to non-tradeable (the real exchange rate, 87-88; 103-106).

As the prologue to this paper mentioned, the research study on which the book was based also looked at the relative price of consumer goods to productions goods.

Consumer Prices

The price of consumer goods is usually measured by the Consumer Price Index (CPI). This is the longest official price series available, beginning annually in 1914 (it is linked back to 1891 – see NZOYB 1990:614), and quarterly from 1925. Over the years the regimen (the items in the index and the weights given to them) has changed. More controversially the treatment of housing and interest payments has undergone major changes over the year, so although it is presented as a continuously defined series it strictly is not. Each figure is published a fortnight after the end of the quarter whose price level it measures, and is not revised.

(There is a second potential (SNA) consumer price series, the ratio of actual nominal consumer outlays divided by the volume (or real or constant price) consumer outlays (as defined and estimated in SNA – System of National Accounts – terms). The available official series is much shorter (annually from 1982?). It becomes available about six months after the end of each quarter and may be revised (for years) thereafter as new data becomes available. This series is particularly useful for international comparisons, because while that the consumer price indexes of most countries have different assumptions, the SNA series are more consistent.)

Producer Prices

The particular producer price series used here (and in In Stormy Seas) is GDEF, which is a price index of all goods and services produced in an economy. It is calculated as the ratio of nominal GDP divided by the volume (or real or constant price) GDP, as defined and estimated in SNA terms.

(Note that the index is – in the conventional notation

Σpnqn/Σp0qn

The base prices (p0) have been updated every year since 1988. This is called ‘chain linking’.)

The available official series is much shorter (annually from March Year 1954/5 and quarterly from 1982?). It becomes available about six months after the end of each quarter and may be revised (for years) thereafter, as new data becomes available.

GDEF also experiences regimen changes over time, just like the CPI. It has the additional complications that until 1971/2? there was no Inventory Valuation Adjustment made to the nominal series. This reduces the recorded stock change by the increase due to inflation.

In summary, the CPI is a longer series, a more timely one, and within its (changing) conceptual framework, it measures more precisely. The advantage of GDEF is that it spans all produced goods and services, and it is not conceptually complicated by the treatment of the housing asset and interest rates. Another distinction – which becomes important later in this paper – is that the CPI basket consists of expenditure items including imports, whereas GDEF is based on a basket of items which are produced.

(An alternative to GDEF would be the producer price indexes. At various stages in the study I used these, and their predecessor wholesale price indexes. This is discussed further below.)

The Relationship Between the CPI and GDEF

The following graph shows the ratio of the CPI to GDEF for the period for which the latter is available. (Note that to make it comparable with the GDEF, the CPI is the year average, not the March quarter on March quarter.)

CPI/GDEF Ratio – Percent Deviation from Trend

It appears that the CPI increases on average about .06 percent a year (.67 percent a decade) faster than GDEF. This hardly matters, despite being econometrically significant. The source of this difference may be that the CPI basket has a higher proportion of services than GDP, or a lower proportion of pastoral products whose terms of trade suffered over the period. In order to assess the interpretation of the graph this trend has been removed.

The graph shows that the ratio of the CPI to GDEF fluctuated between 4.2 percent above and 6.0 percent below the trend. The fluctuations are not entirely random. (The Durban Watson statistic which measures autocorrelation is .87, some distance from the 2.1 value which would indicate there was no year to year correlation between the random errors of the equation).

The fluctuations are sufficient to be horribly misleading if the CPI is used instead of GDEF to deflate nominal GDP to estimate volume GDP. The worst case would have been between the 1968/9 and the 1972/3 year, where using of the CPI would have over-estimated GDP growth by 2.7 percent p.a. While volume GDP grew 16.7 percent over the four year period, the use of the CPI as a deflator would have shown a 29.7 percent increase.

Considerations such as this were sufficient to suggest the CPI was not a good measure of overall inflation. In Stormy Seas used GDEF as the prime price measure indicator (a decision reinforced by the need to make international comparisons).

In passing it should be noted that if inflation is defined as a ‘general (and continuing) increase in prices’ then there was inflation in every year on either measure. The issue is not whether there was inflation, but how much.

The Reserve Bank Target

This work was first done at the end of the 1980s, and has informed my thinking since. However, until this paper I have not consciously applied its implications to the Reserve Bank of New Zealand’s inflation targeting regime. On a number of occasions I have criticised it (see The Reserve Bank Index, although it is not complete). But this is the first occasion that I have explicitly involved this research into the criticism.

The Reserve Bank of New Zealand Act requires the Bank to pursue price stability which it does not define. This is provided for in the ‘Policy Targets Agreement’, which the Minister of Finance and the Governor of the Reserve Bank sign. The PTA of 17 September 2002 says:

Policy Targets Agreement 2002

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

1. Price stability

a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices

b) The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

2. Policy target

a) In pursuing the objective of a stable general level of prices, the Bank shall monitor prices as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b) For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term.

3. Inflation variations around target

a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

b) When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its medium-term target.

4. Communication, implementation and accountability

a) On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target.

b) In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.

c) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

The visitor from Mars might ask why the PTA targets the Consumer Price Index. The historic explanation might be that for most of the seven decades until the passing of the Reserve Bank Act, a major inflationary consideration was the linkage between consumer prices and wages, and the Consumer Price Index became enshrined in the public as ‘the’ measure of inflation. Little consideration seems to have been given when the policy was developed as to whether a better price target would be more appropriate. (Indeed, from the papers made available under the OIA, very little attention was paid to the mechanisms by which the Bank could affect the price level. Rather there seems to have been an acceptance of the theory which underpins the simplest monetarist prescriptions, including the single commodity description of an economy.) Perhaps it might be argued that the primary issue seen to be facing the Bank was to ‘squeeze out’ inflationary expectations, and it was therefore necessary to use an index with which the public was familiar. That is not an reason for continuing with the CPI as the inflation target.

Now-a-days the Bank looks at a range of price indexes (including GDEF) as a part of informing itself of the state of the inflation. But the target remains the CPI. This would not matter if the prices all moved closely together. The CPI versus GDEF comparison shows they do not.

There are 47 years (since 1955) for which there is data on the annual price changes. In over half (28) the price changes in the two indexes differed by more than 1 percentage point. In another 13 (over a quarter) the price changes differed by between .5 and 1.0 percentage points. Thus in only 6 years (less than a quarter) was the difference less that half a percentage point. These are much larger differences than are accepted as tolerable in the public discussion on the forecasting and outcomes of the CPI. (The Standard Deviation of the difference over the full period was 2.1 percentage points.)

Is this only a short term phenomenon?. The PTA does not specify how long the medium term is, so let us take a three year horizon – about the length of the average business cycle. In 26 of the 45 observations (over half) the changes in the two indexes differed by more than 1.5 percentage points (or .5 percentage points a year).

What about the period in which the Act was in force? Excluding 1990/1 (a bad year in which the divergence was 3.1 percentage points), in the remaining 13 years, there were four in which the percentage increase between the CPI and GDEF exceed 1 percentage point, and another five when the divergences was between .5 and 1.0 percentage points. So the pattern of deviation since the Act has not been very different from before the Act. (I have not detailed the three year pattern, because the run is so short, but the long term conclusion probably applies to it too.)

In summary, there has been considerable year to year deviation between the two price indexes over the period for which we have data, and it is not evident that there has been a significant improvement in the last decade either as a result of the Reserve Bank Act or of the improvements in the measurement of GDEF.

Are There Consequences from the Choice of Price Index?

Whether there are consequences from the choice of the price index used to define price stability in the PTA is a bigger issue than this paper’s concerns. Here I simply set down some down.

The CPI and GDEF measure very different forms of economic behaviour. The CPI is an expenditure-side price index, and GDEF is a production-side one. Effective targeting on the CPI requires some theory of the determination of expenditure prices, whereas targeting on GDEF has a more production orientation.

In fact, the Reserve Bank’s account of the inflation mechanism seems to focus on the production side, especially the output gap in aggregate and in individual markets. Ii is unclear how this relates to the expenditure-side price measure which the Bank is targeting on.

In a one commodity model there is no problem. But in fact the CPI is based on a basket of which only around 60 percent of which is domestically produced, the other 40 percent being imported. (This is an old ratio and has not been updated. It is net of indirect taxes and subsidies.) Assuming, for a moment, that the price of imports (and the exchange rate) are fixed, monetary policy is targeting on only 60 percent of the CPI basket, which makes up about, say, 36 percent of GDP (since private consumption is only about 60 percent of GDP). In particular the pricing behaviour of most of the investment, almost all the public sector, and a large part of the export sector have little relevance to the CPI.

IUnfortunately the prices in that 36 percent do not move in parallel with the other prices in the economy, as the CPI to GDEF ratio shows.

Moreover, the CPI’s considerable dependence on import prices leaves another circuit to reduce its level – the exchange rate. Monetary policy can be used to push up the nominal exchange rate, which lowers import prices and thereby reduce the rate of CPI inflation. Textbooks, such as Krugman and Obstfeld, imply this is not possible in the long run, but they use a single price (that is, they are single commodity models ill suited for open economies) and the whole point of an exchange rate change is that it changes the relative price between the expenditure and production side of the economy. The analytics of aggregate price determination models become very murky when the exchange rate appears in the aggregate price level. It seems that the models may generate multiple equilibria with a high and low GDP (although the higher one may be unstable).

Once the exchange rate becomes an intermediate target (whether consciously or unconsciously) it impacts on the CPI inflation rate through the following circuits:
– it directly lowers the price of consumer goods and services via a lower price of imports;
– it pressures domestic producers competing with imports to keep their prices as low;
– it eases wage pressures, in so far as wage demands are in part determined by changes in consumer prices.

Under the fixed exchange rate regime before 1985, New Zealand had a practice of over-valuing the exchange rate for anti-inflation purposes . Under the floating rate which followed after 1985, monetary policy restrained inflation by using the same over-valuation circuit.

The Exchange Rate and the Growth of the Economy

But as experience of the decade after the float shows, an over-valued exchange rate restricts the expansion of exportable sector, which depresses the aggregate growth rate of the economy. This was a major theme of In Stormy Seas, and the evidence since its writing confirms the conclusion that the health of the exportable sector is crucial for sustainable economic growth. (Notice this introduces an extra commodity in the story: ‘exportables’. Krugman and Obstfeld do not even cite ‘tradeables’ in their text book’s index.)

What differed between the pre- and post-float regimes of exchange rate over-valuation was that in the earlier period the government subsidised (in a variety of ways) the exportable sector (while imports were also restricted). This is not to argue for those policies, but to explain how the interventionist wedge enabled the exportable sector to grow.

Almost all the export subsidies and import restrictions were eliminated from 1985, while the exchange rate valuation was maintained. Exports now almost stagnated. while imports surged. The actual growth rates between calendar years 1985 and 1993 were 3.1 percent p.a. for goods exports and 4.5 percent p.a. for imports of goods, according to the OECD Outlook, while OECD exports grew 4.8 percent p.a. and 5.6 percent respectively. Without going into details – I have done so elsewhere – New Zealand lost world export market share, while its import penetration ratio (relative to GDP) rose. Exports did better than the pure theory might have predicted given this over-valuation, because there was a carry-over from earlier (pre-1985) policies which stimulated the export supply of petrochemicals, forest products, and horticultural products (probably others, but these impacts are measurable), while the energy/petrochemical expansion also reduced imports.

What happened was exactly as economics predicted. When the return to exporting fell from the over-valued exchange rate (and the removal of subsidies) the export industry shifted back down the aggregate export industry supply schedule until all that was left was the (diminished) industry which was viable at the higher excahnge rate. At that point it began expanding again – as did the New Zealand economy as a whole.

Much of this analysis was available over a decade ago. What this section does is tie in how the choice of target price index in the PTA can limit the poor performance of the New Zealand economy by further detailing the mechanisms involved. This is also the most detailed account I have written of the ineptitude of the single commodity model to characterise the small open multi-sectoral economy.

What should be the PTA Target Price Index?

The extension to this paper is to raise the question as to what is the appropriate price index (or indexes) to target upon, since the choice of index matters. The long run relevance of the CPI is unclear given that it is an expenditure side index, covers a relatively small part of the economy, and is overly influenced by the exchange rate.

On the other hand GDEF is to slow to be published, and subject to revisions. However there are other quarterly production based price indexes – in particular the producer price indexes – which are much more economy wide that the CPI. One might envisage Statistics New Zealand upgrading the indexes, including speeding up their publication, so that one (probably the PPI-Outputs) could be phased in to replace the CPI over a number of renegotiated PTAs. A weakness of the PPI series is that we do not have the same experience of their use (historically they are – in their current form – a shorter series), and they may be subject to greater error. But as Keynes famously said ‘it is better to be vaguely correct, than precisely wrong’.

However, it even more important to limit the use of an over-valued exchange rate as the primary circuit for controlling inflation in New Zealand. The first step would be to discard single commodity accounts of the economy, to recognise there are a variety of price relativities which are relevant, and that they move quite differently from one another.

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Distributional Economics: Index

This entry was posted in Distributional Economics on by .

Research (Indexes)

The Economic and Health Status of Households Project (Index)
Household Equivalence Scales (Index)

Research (Articles)

Beware the Median (May 2002)
Income Distribution and Equity (August 1999)
What Has Happened in New Zealand to Income Distribution and Poverty Levels (July 1999)
Globalization and A Welfare StateChapter 3: The Progress of Poverty & Chapter 7: Thinking Systematically About Poverty (December 1997)
Income Distribution: Part I and Income Distribution: Part II (January 1996)
Poverty in New Zealand – 1981 to 1993 (November 1995)
The Fallacy of the Equity vs Efficiency Tradeoff. (June 1995)
Properly Assessing Income Adequacy in New Zealand (January 1995)
There are a number of earlier research papers, notably Income Distribution in New Zealand 1983 (Book not on website).

Other Relevant Pages concerned with the policy implications

Family Policy (Index)
Globalization and A Welfare State (Index)
The Commercialisation of New Zealand Chapter 3 ‘The Abandoning of Equity’ (July 1997)

Listener Columns (Miscellaneous)

Closing the Gaps: Policy Or Slogan? (November 2000)
In the Midst of Plenty (December 1985)

Retirement & Superannuation (index)

This entry was posted in Index, Retirement & Savings, Social Policy on by .

Keywords: Retirement & Savings; Social Policy;

Lock into Savings (October 2004)
Old Money: If Life Expectancy is Rising, Should the Age for the Pension Rise, Too? (November 2003)
Rewarding Service by Neil Atkinson (Book Review) (August 2002)
Whimpering of the State Chapter 5 (July 1999)
Richard Thaler’s Savings Principles (July 1999)
In the Abstract: Will Most of Us Have an Impoverished Retirement? (June 1998)
Globalization and A Welfare State: 12 Appendix: Provision for Retirement (December 1997)
Divided We Stand (November 1997)
Crisis What Crisis? The Aging Problem Needs to Be Tackled Soberly (September 1997)
The Sweet Hereafter: Will You Be Better Off Under RSS? (August 1997)
Different Strokes: Superannuation Schemes Are Being Designed by Successful Men (August 1996)
Risky Retirement
(May 1996)
Selfish Generations by David Thomson (May 1992)

*********
Footnote for Listener 7 November 1998

RETIRING BATTLES

The government claims it’s recent change in retirement policy was merely following the last seven years’ practice of increasing New Zealand superannuation in line with prices, rather than wages. But the 1993 Accord on retirement provision agreed that when a certain floor was reached (65 percent of the average wage for a married couple), wage indexation would recommence, so the retired would share in any rising prosperity. The level has just fallen below the 65 percent, and the government simply ignored the Accord. We have no guarantee that when the new floor of 60 percent is reached it will be ignored again, for there already has been talk of a 55 percent of wages floor.

In announcements not noticeably transparent for their honesty, the government said that nobody would be worse off, and there was a fiscal saving of $2.5b over ten years, outperforming the miracle of the loaves and the fishes. The removal of the surcharge on the top third of the elderly also costs about $2.5b over a decade. The net effect has be the bottom two thirds of the elderly pay for the disposable income gains of the top third.

Economic Globalisation and National Sovereignty (II)

This entry was posted in Globalisation & Trade, Governance, Political Economy & History on by .

Chapter for the New Zealand Government and Politics 2ed, edited by Raymond Miller (OUP). First Edition Chapter

Keywords: Globalisation & Trade; Governance; Political Economy & History;

In recent years there has been increasing concern that the phenomenon of supranational economic integration, popularly known as economic ‘globalisation’, is undermining the sovereignty of the nation state. In New Zealand, this has been symbolised by international agencies such as the International Monetary Fund (IMF), World Bank, and World Trade Organisation (WTO). This chapter will explore the economic context of the debate.

Economic globalisation is not a new phenomenon. Arguably, the world was more globalised in the nineteenth century, when migration was much easier and national governments were limited in their ability to interfere in the flows of capital and goods – not only did they have less political power, but there were fewer policy instruments at their disposal. But there were no international agencies (although in some respects the British empire filled some of those roles). Even so, in the last half of the twentieth century there was an intensification of globalisation, following a period when there were significant barriers to economic intercourse.

Yet the term ‘globalisation’ is neither well defined nor well understood. To critics it means individual countries losing their autonomy over the management of their economies. As a consequence, they tend to argue, the general public is less well off. The first view is surely ahistorical. Colonial New Zealand, trading in the international economy from the outset of European settlement, experienced little autonomy. Indeed, New Zealand has always been heavily dependent upon foreign capital and international trade. While parts of the economy have, at times, been isolated from the rest of the world, arguably this had the effect of further exposing the remaining sectors to the vagaries of the international market.

Moreover, it was the nineteenth century forces of globalisation – refrigeration, improved shipping and communications, and Britain’s policy of free trade – that enabled New Zealand to rise to its current high standard of living by exporting pastoral products. It is possible that some New Zealanders could be losers from some of the current technological changes, just as British farmers were from refrigeration. All economic change, including globalisation, involves winners and losers. But it would be foolish to say all globalisation is necessarily bad.

Once the point is recognised, the argument cannot be presented in rhetorical terms but as a matter of careful judgments balancing competing arguments. While it would be easy to conclude ‘it all depends’, it may be more useful to use the analysis to understand what is happening and what are the opportunities and threats.

The economic theory

The assertion that globalisation makes some economies worse off is rejected by some economic theory. There is a well-established view that, subject to some ‘minor’ caveats, the economy as a whole is better off under a free-trade regime in which there are no government-imposed restrictions (compared to any other practical alternative). In the sense described here, ‘better off’ means that there will be more material goods and services to share among the population as a whole.

However, the critics argue that shared benefits may not actually occur. First, the theory assumes that there will be full employment, so that labour and other factors of production that become unemployed as a result of free trade will be redeployed. Sometimes that does not seem to happen, or does not seem to happen for quite a while.

Second, the theory as presented here does not address the possibility that some people may be worse off. For instance, the theory allows that abandoning protection on car assembly results in lower prices for imported cars for all consumers, and that the assemblers transfer to the hospitality industry, say, to earn the foreign exchange from tourists coming from countries that assemble the cars. Even though the country may be better off, the assemblers may be on lower wages and worse off. Advocates of free trade rarely mention this phenomenon, yet it is real enough for millions of displaced workers.

Third, the economic theory does not provide an estimate of the magnitude of the gains from free trade. When the actual potential gains are quantified they prove surprisingly small. For instance, estimates for New Zealand in the 1970s (using quantitative models based on precisely the economic theory alluded to earlier) suggested that the gains for total free trade were less than 1 per cent of GDP, although protection was considerably higher than in the 1990s.

The formal models usually assume that labour and capital are fixed in quantity. But a reality of the new world economy is that international investment flows are substantial and significant, while international migration may be greater than it was, say, a quarter of a century ago. It is not immediately obvious that migration of capital and workers are in a country’s interest, even if it is in the interest of the capital’s owners and (perhaps eventually) the migrating workers.

The political economy of globalisation

It is worthwhile briefly going through the limited conclusions of economic theory, not only because the rhetoric points to greater gains than the theory or the evidence would suggest, but also because it poses the following question: Why is globalisation happening at all? The answer seems to be that it is largely driven by technological changes that have transformed the human geography of the world. Fundamentally the issue is the political and social consequences of technological change.

The results of this change can be seen in the remains of dairy factories scattered throughout Taranaki. Fifty years ago there were numerous factories, each within a few tens of miles of one another. Today there are but two-one. What drove these changes? The sealed road and the motorised milk tanker made it easier for the dairy farmer to deliver the milk further afield. At the same time, larger dairy factories reaped economies of scale that made it worth their while to use milk from more distant farms. The changes meant that dairy farmers were better off (since the lower costs of processing increased their return), but was the whole of Taranaki better off? Some dairy factory workers had to travel further; some villages slowly died. However, generally the change was gradual enough, the region small enough, and the people mobile enough for the communities to adapt to this provincial ‘globalisation’. The communities may have even directly benefited from the improvements in roads and transport, since a wife could get a job in a different place from that of her husband. Indeed, they might both work some distance away from the family home, and might even spend their weekends in yet a fourth location.

A more severe example of this change occurred with breweries, which were once scattered throughout the towns and cities of the nation. Today’s four largest breweries are found in Dunedin, Christchurch, Hastings, and Auckland, as the costs of transport has fallen and economies of scale become more powerful. In this instance the closures were more socially disruptive. Wellington brewery workers could not live in the same house and travel daily to the Hastings brewery after the local one closed down. The worker could move, but that would be likely to have involved a significant social upheaval for the family. In this instance, the benefits of economic rationalisation were likely to go to consumers, in the form of cheaper prices and better choice.

What about boutique breweries which fill niches the big ones can not? They exist because there are technologies that are not so dependent upon economies of scale, and because there is a growing heterogeneity of consumer choice. Certainly they generate jobs in particular localities, but it is also significant that rarely do boutique businesses expand into national and international businesses, neither do manufacturers of boutique goods make up a sizeable part of employment in most industries. (An exception is the fashion clothing industry.)

Suppose a major brewery was to move to Australia, using cheap transport to supply the New Zealand market. That is worse for the community than if the business had gone to a distant part of New Zealand,for any adjustment is usually slower across international boundaries than within nations. Moreover, unlike the intra-national shift, the international relocation reduces the tax base of New Zealand (and increases the tax base of the country of destination). In the long run, labour market adjustment (migration) may resolve an imbalance; but, as Keynes remarked, ‘we are all dead in the long run’.

Even if these economic issues can be resolved, there remains the question of national identity. New Zealanders are likely to be offended that the business has chosen to move offshore. (Whether they are sufficiently offended to prefer to consume a higher-cost domestic substitute puts an economic limit to their indignation.) Thus nationalism is part of the concerns about globalisation– the shifting of business activity to another country is seen to be much more troubling than a shift between regions within a country.

In the examples given here, the changes are a consequence of economic responses to technological change, which are transmitted by profit seeking and other market mechanisms. However a less market-oriented, economic decision-making system may not be that much better. A major danger, as we saw in the planned economies of Eastern Europe, is that it would stop some of the technological change.

The illustrations of the breweries and the dairy factories involved gains from production scale and improved transport. The combination has generated one of the most extraordinary and under-appreciated changes in the international economy. Today, ‘intra-industry trade’ – where countries exchange the same products (e.g. Germans buy Citreons and French Volkswagens) – makes up a quarter of international trade, up from near zero fifty years ago. Despite its growing importance such trade is largely ignored, perhaps because it contradicts the model used in the section on economic theory, for such models ignores the costs of distance and assumes that economies of scale are irrelevant. Moreover, the model’s conclusion of a well determined equilibrium no longer holds. Under inter-industry trade the location of a business may be to some extent dependent upon accidents. The traditional model cannot predict that Nokkia-like firms will arrise in small economies such as Finland. The new intra-industry trade ones can.

By the end of the twentieth century the greatest technological change was coming from improvements in communications. This means that globalisation can now apply to many of the service industries and even to knowledge itself; and that it is possible to globalise business control in a way that was not possible in earlier times.

Moreover, today communities seem more heterogeneous, or perhaps the heterogeneity is better recognised or more easily expressed because of increased affluence. One way this heterogeneity shows is in increasingly fragmented the desires for goods and services, which are more difficult to supply from a single (and hence in a small economy, local) plant. A long time illustration in New Zealand is the preference for a variety of motor vehicle models, so that no local car assembly line has been able to achieve the economies of scale that would make it internationally competitive.

Of course the increasingly heterogeneous communities still have commonalities. One of these commonalities is a national identity, and that expression of an identity via state and economy, including ownership of common property and images. Thus the pressures to reap the technological opportunities that generate globalisation clash with the demands for community and national expression.

Very often it is a clash between the national and the personal. Many of those who publicly object strongly to the consequences of globalisation at the same time avail themselves of its benefits in their personal life: international travel, information sourced from overseas, foreign produced food, clothes, and computers, domestic transport dependent upon overseas imports, and so on.

In summary, the political economy argument is that technological changes – especially the falling costs of distance coupled with economies of scale – are driving globalisation. It is easy to identify the damaging elements of the changes and ignore the beneficial ones, or vice versa. Globalisation seems to benefit some people to the detriment of others. But perhaps it is really the technological change rather than globalisation itself that is detrimental to these people, undermining especially workers with now obsolete skills, or living in locations with now obsolete attractions. However, the problem of people being left behind by technological change is an old one, pre-dating even the Luddite cotton weavers. What is new is that in New Zealand’s experience the most prominent beneficiaries of globalisation seem more likely to be offshore. Less prominent beneficiaries are often general consumers.

The economic state in a globalising world

Globalisation thus challenges us with the question ‘What choice (or what control), if any, does a society have over its social and cultural policy?’ A common view is that international competitive pressures are so strong that they will drive every country down to the lowest common denominator of a pure market economy, with a minimum of government intervention. A small community in a globalised world, so it is argued, has no ability to shape its destiny.

For instance, suppose a society wanted to have a welfare state, providing a degree of public social security. That would involve taxing the incomes of factors of production and of individuals. This would either raise the costs of production, so industries would move offshore to countries where they were not taxed, or depress the returns on factors of production such as capital and labour, which would migrate to countries where their return was not so depressed. The logic of this account is that all countries will be pressured towards minimising taxation, forcing them to dismantle their welfare state and shift to private provision.

In practice, this seems to be overly pessimistic insofar it has not happened and does not seem to be generally happening. However, there may have to be changes to the way the welfare state is organised. Some people will be worse off as a result, yet those better off may include some of the poor (who may benefit from the newly created jobs, for instance). As a result defenders of the traditional welfare state may vigorously resist the changes, even if a lot of the poor are better off. It is right to draw attention to those who are worse off, but doing nothing may make them more so, and make others poorer too.

Much of New Zealand’s difficulties in debating such issues arises from the public prominence of the traditional defenders of the welfare state on the one hand, and right-wing ideological extremists who care little for what is happening to people, on the other. There are options between doing nothing (other than closing up the economy) and the sort of ‘trading naked’ strategy that the extremists have advocated. (New Zealand’s propensity to strip away all interventions has been likened to someone at a picnic taking off all their clothes in the hope that others will follow. The punch line is that the rest of the picnic looks at the naked one, and puts on another jersey.)

Certainly some policy instruments – increasing quotas and tariffs, for instance – are prohibited for international trade reasons, at least in small economies. Even large countries imposing border barriers are likely to be hauled off to the WTO. A positive conclusion may be that the policy issue is to identify new effective forms of industrial intervention although in practice the challenge to implement effective policies may prove harder than it looks.

However, even given greater attention to industrial policy, we can expect greater harmonisation of economic and other relations between countries over the next few years. Again there is a long history. There was grumbling when New Zealand metricated for international trade reasons (as the official statements clearly emphasise) but this was not seen to be a case against the globalisation it was enhancing. The scope of the legal harmonisation is increasing. For instance, there has been active discussion on the degree to which New Zealand should align its competition legislation with Australia’s. Part of the debate is about which regime is more appropriate, but there is also a theme that there are advantages in having a broadly common regime. There is no compulsion to align the legislation. The issue is that of the benefits and costs of doing so. Even were New Zealand to adopt the Australian legislation in total, that would be a sovereign act, and at a later date a New Zealand government might choose to enter into an alternative legislative arrangement. This applies for most other harmonisation, although once it has been adopted it may become increasingly difficult to abandon it.

Harmonisation and international law are not confined to economic matters. There are parallel developments for human rights, peace, the environment, and so on. Indeed those who oppose economic globalisation are often strong advocates of the extension of international law in other realms.

Foreign investment and capital flows

A strong theme in the agitation against globalisation is the increasing ownership of New Zealand capital by foreign firms, and the rising New Zealand foreign owned debt. Again this is not new. It would be easy to argue that the issue is not of national ownership but of national control. Historically a foreign firm that built a factory in New Zealand to supply local markets was almost as dependent upon the New Zealand government as a native one. However, it is widely believed that New Zealand now has less economic control than it had in its recent past, it being argued that globalisation makes it easier for all firms to evade a nation’s control by shifting their activities to less demanding regimes.

Partly it is a matter of magnitude. There is no comprehensive indicator of foreign ownership, but as good as any is foreigners’ share of income from production (technically the nation’s property and entrepreneurial income payments to the rest of the world). In the early 1980s the net aggregate income amounted to between 3 and 4 per cent of GDP. In the early 2000s the ratio was between 7 and 8 per cent, or double that of two decades earlier.

The rise is largely a consequence of the savings and investment decisions of New Zealanders. Over the period domestic savings were insufficient to fund the capital investment the economy demanded, so businesses went offshore to fill the gap. It is a fundamental rule of finance that borrowers (individuals, businesses, or states) reduce their capacity to make independent decisions by the extent to which they are in debt. If the debt rises, that capacity to act independently – their sovereignty – falls. Now it may be argued that much of New Zealand’s past borrowings were unwise – a view with which most future economic historians are likely to agree – hence the problem is not with foreign investment, but with unwise domestic decisions.

Such considerations are unlikely to satisfy those who must suffer from the past decisions, nor does it address the symbolic significance of ownership of an asset to the dispossessed (nicely illustrated by the priority tribal groups (iwi) have given to regaining land from which they have been alienated). While acknowledging this symbolism, however, an economist might ask whether the holders are willing to make the related material sacrifices (as iwi may be doing by taking lower returns in their holdings of land than they might obtain from other investments).

Conclusion

Global financial markets may be overly liquid, and hence excessively volatile. New Zealand, like most debtor countries, no longer depends only upon foreign direct investment (that is, in equity in businesses) to cover its savings gap. Much of its stock of foreign liabilities is in financial instruments that may be withdrawn at short notice (albeit, perhaps, at some cost to the lender). Thus the New Zealand financial system, and the economy that depends upon it, can be subject to substantial external financial shocks. In my opinion, global liquidity is excessive, and potentially detrimental to the global economy. If that detriment occurs, New Zealand is likely to suffer more than most.

That raises the central dilemma that every country faces. The global economy is far from ideal, yet not to engage in it also has offsetting costs. It has been the theme of this chapter that technological changes are increasingly integrating the economies of the world to the general benefit of those involved, although some workers and businesses suffer. However, the global economy may be mismanaged at the international level and domestically. The difficulty that confronts each economy is how to relate to this imperfect situation. The choice is not of autarchy or even maintaining the current status quo, were that possible. Nor is there any benefit in returning to the radical policies practised in New Zealand in recent years – the ‘trading naked’ strategy. Striking a balance between these two extremes poses a number of difficulties, especially for a small country with so little influence.

The critics of globalisation confuse several different issues: the actual global arrangements compared with alternative (and possibly better) ones; the actual policies of New Zealand towards globalisation and other economic issues compared with alternative (and possibly better) ones; and the current losers from globalisation compared with the gainers, while the losers are portrayed as exclusively the poor and the gainers as exclusively the rich. In this confusion it is difficult to identify an alternative, other than one that addresses particular issues (such as protection for a car assembly plant) without examining the general consequences. Neither the uncritical anti-globalisers nor the uncritical pro-globalisers help much towards identifying the options that exist between the extremes. The result has been that New Zealand’s policy decisions have been much less effective than those of many other countries, as evidenced by its poorer international trading performances.

Either approach compromises New Zealand’s sovereignty, although to be realistic we have little idea of what the sovereignty of nations may look like in the long run. With a few exceptions the nation-state is a relatively recent development – less than a couple of centuries old. It may not last another two centuries. However, the cultures that underpin the nation-state are usually older than the state itself, and are likely to survive it. The notion that the world will end up as a grey cultural soup seems unlikely in this new century at least (it has not in the US) . Nationalism, including ethno-nationalism, may not be the force it has been, but it will continue to be a substantial factor in international relations and economics.

As with other economies, New Zealand has some choice over the degree to which it is engaged in the world economy, although each option has costs as well as benefits. Insofar as New Zealand can exercise this choice it retains its economic sovereignty. Yet by going into trading and other economic relationships its choice is reduced. A useful parallel with international trade and investment is marriage. To enter into such a relationship involves some loss-even a permanent loss-of sovereignty. Yet such are the perceived benefits relative to the costs that individuals do get married, and they remain married even when it is evident to others that there are severe downsides in the arrangements. Thus it is with international trading relationships. The general benefits are judged to exceed the general costs.

Even so, for New Zealand international economic relations is rarely a marriage of equals, and sometimes it is a menage-a-trois. The difficulty that New Zealand faces with the proposed US free trade arrangements is more that it would be stranded if its CER partner, Australia had one and New Zealand did not. (New Zealand’s international trading preference is for multilateral arrangements (a harem?) But it may not always have the option.

Moreover international policy may constrain a country’s international political policies. The New Zealand government would deny that this is happening today (e.g. in terms of its stance on the war on terrorism), but it is true that political responses are often presented to improve economic opportunities.

The globalisation debate is really another example of a question that has created a central policy tension for at least two centuries: To what extent should an individual’s life be regulated by market decisions, and to what extent should it be regulated by government/bureaucratic decisions? For those who are not extremists, there is no simple resolution to this question. Globalisation reduces the ability of the government to regulate the life of the nation. At the same time its ability to enhance the benefits from technological change offers opportunities that individuals did not have in the past. Ideally we want to maintain the benefits of both national sovereignty and the technological opportunities. For a small country that may be impossible, and eventually all countries may be too small in a globalised world.

Who knows what the long-run outcome will be? Over the last century nations have developed powers to control the market mechanism and restrain its excesses. We may well see a similar evolution of supra-national powers, with a repeat of the struggle as to who controls them and in whose interests they are exercised.

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Further Reading
Cairncross, F. 1997, The Death of Distance, Harvard Business School Press, Boston.
Chatterjee, S., Conway, P., Dalziel, P., Eichbaum, C., Harris. P., Philpott, B. & Shaw, P.
1999, The New Politics: A Third Way for New Zealand, Dunmore Press, Palmerston North.
Easton, B.H. 1997, In Stormy Seas: The Post-war New Zealand Economy, University of Otago Press, Dunedin.
Giddens, A. 1999, Runaway World: How Globalisation is Reshaping our Lives, Profile Press, London.
Gomoroy, R.E. & W.J. Baumol 2000, Global Trade and Conflicting National Interests, MIT Press, Cambridge, Massachusetts.
Gray, J. 1998, False Dawn: The Delusions of Global Capitalism, Granta, London.
Kelsey, J. 1999, Reclaiming the Future: New Zealand and the Global Economy, Bridget Williams Books, Wellington.
Krugman, P.R. 1997, Pop Internationalism, MIT Press, Cambridge, Massachusetts.
Krugman, P.R. & M. Obstfeld 2000, International Economic: Theory and Policy, 5th edition, Addison-Wesley, Reading, Massachusetts. (Especially pp.139-141 on intra-industry trade.)
O’Rourke, K.H. & Williamson, J.G. 1999, Globalization and History, MIT Press, Cambridge, Massachusetts.
Reich, R. 1991, .The Work of Nations, Simon and Schuster.
Schwartz, H. M. 2000, States Versus Markets: The Emergence of a Global Economy, St Martin’s Press, New York.
Soros, G. 1998, The Crisis of Global Capitalism, Public Affairs, New York.
Stiglitz, J. 2002, Globalization and its Discontents, Allen Lane, London.
Strange, S. 1996, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge University Press, Cambridge, England. .

The author’s writings on globalisation

Discussion Questions
1 Why do people differ so deeply on the question of globalisation?
2 ‘Globalisation is not a new phenomenon. It was particularly vigorous in the nineteenth century. Without it, New Zealand would not have been founded or have flourished.’ Discuss.
3 What makes this round of globalisation different from previous ones?
4 ‘New Zealand has always been a neo-colony.’ How then is the nation-state compromised by the new globalisation?
5 ‘Whatever one may think about the rights and wrongs of globalisation, its forces are so strong the issue is how to live with it.’ Discuss.
6 To what extent are multilateral agreements (such as the Doha WTO round) more in New Zealand’s interests than bilateral ones (such as a free trade agreement with the US.). Can New Zealand remain out of a multi-lateral agreement; can it remain out if bilateral ones become prevalent?
7. Are New Zealand’s international economic policies consistent with its international politics ones? Are the latter moderated for the former, and if so is it the substance which is moderated or the presentation?

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Two Great Economists: Raymond Firth (1901-2002) & James Tobin (1918-2002)

This entry was posted in History of Ideas, Methodology, Philosophy, Listener, Macroeconomics & Money, Maori on by .

Listener 25 January, 2003.

Keywords:
History of Ideas, Methodology & Philosophy; Macroeconomics & Money; Maori;

I would start a beginning course in economics with Economics of the New Zealand Maori by Raymond Firth, who died last year. Not only is the book a part of our heritage but it confronts students with the classical Maori economy which answered the central economic problems of ‘what, how, for whom, where and when’ in quite different ways from today. Starting with an alternative to the narrow idealised version of the US economy which they are usually taught, would help students realise how special it is. It might even suggest that every economy is particular, and such general economic principles there are, need not result in the policies which slavishly follow from the idealised US one.

Firth went on to field work in Tikopia, the west Pacific Island recently devastated by a cyclone, to become one of the world’s greatest economic anthropologists. His PhD is important because it was the first English language study to use the notion of the ‘gift relationship’ developed by the French anthropologist, Marcel Mauss. The Maori did not ‘trade’, but exchanged on a reciprocal basis of gifting. This involves the participants knowing one another. In contrast, in a monetary economy one can sell a good or service without knowing anything about the trading partner, except the reliability of the currency being used.

The commercial world of the gift relationship has largely passed by, although it continues to lurk in intra-family relations and between close friends. One also sees glimpses of it on the marae. One public place where it still exists involves the donating of blood. Its classic study – another great study of the twentieth century – is The Gift Relationship by Richard Titmus, a colleague of Firth. (Economist Mike Cooper, a past Otago University professor, was another New Zealander involved in the development of the book.)

The Maori responded remarkably quickly to the market economy when it arrived with the Europeans. Money has two great advantages. It enables transactions between strangers, with the resulting increase in the market allowing specialisation of economic activity which, as Adam Smith observed in the making of pins, raises productivity.

While all economies are vulnerable to shocks from natural events such as earthquakes and weather, monetary economies also suffer from fluctuations known as ‘business cycles’. It was not until John Maynard Keynes that economists were sure that the cycles had an inherent monetary element (the challenger was Marx’s theory of the falling rate of profit). While Keynesian policy prescriptions can ameliorate the cycle to some extent, they have proved unable to eliminate them.

James Tobin who also died last year, was known as the ‘American Keynes’ – he famously (and modestly) summarised his contribution to the understanding of the complexity of financial assets (for which he was awarded a Nobel prize) as ‘dont put all your eggs in one basket’. He also contributed to statistics (Tobit regression), investment analysis (Tobin’s q) and he was one of the earliest to attempt to adjust GDP for environmental depletion, congestion and crime. (He also appears in the The Caine Mutiny as ‘Tobit’.)

Popularly, he is best known for the ‘Tobin Tax’, to be levied on financial transactions. Many see this as a new source of revenue (proceeds from the international version would go to the poor countries, they hope). But like his advocacy for a negative income tax, Tobin justified it using deep economic theory. The productive economy (the bit of that exists even under the classical Maori) operates at a different pace to monetary transactions. The deregulation of recent years might be thought of as aiming to speeding up transactions in the productive sector. But it is still not fast enough, so Tobin wanted to add some ‘grit’ to monetary transactions to slow their spinning to a rate closer to production.

Tobin’s tax may never be implemented internationally, because the political conditions may not exist. Even so, I was intrigued by a recent contribution by Jagdish Bhagwati, one of the most vigorous advocates of ‘free trade’ in the economic fraternity. He argues against freedom of capital movements, calling for controls – restrictions and prohibitions – on high spinning capital, in contrast to his position on the international trade of goods and services. A Tobin Tax would have a similar effect, because it is the high spinning transactions which would be taxed most often.

Today’s financial transactions do not always occur with money such as notes and coin. Tobin’s Nobel prize winning research recognised the spectrum of financial assets in theory but it is harder to recognize all the practical variations. We have moved a long way from the economy since the classical Maori. But ultimately money is a veil which hides the production and consumption which has been the real economic purpose of humankind.

Maori Index

This entry was posted in Index, Maori on by .

Items with a substantial discussion on the principles of the Treaty of Waitangi marked *

Keywords: Maori;

Riches without Wealth (November 1979)
For Whom the Treaty Tolls (February 1990)*
The Green Maori (May 1990)*
The Maori Broadcasting Claim: A Pakeha Economist’s Perspective (September 1990)*
Evidence of Brian Easton with Respect to Te Oneroa-O-Tohe (March 1991)*
Tikanga and Te Oneroa-O-Tohe (May 1991)*
Te Whakapakari Paapori, Ohanga o Muriwhenua (June 1993)
Fishing and the Chatham Islands (September 1993)
The Maori Geothermal Claim: A Pakeha Economist’s Perspective (September 1993)*
The Maori Electoral Enrolment Option Campaign (February 1994)
Contract, Covenant, Compact: the Social Foundations of New Zealand Governance (April 1994)*
The Maori in the Labour Force (November 1994)
A Quiet Revolutionary: Eru Woodbine Pomare: 1942-1995 (February 1995)
A Data Base for Iwi (May 1995)
Divided Issues: The Myth of the Unified Maori (June 1995)
Working with the Maori: Consultancy, Research, Friendship (August 1995)
The Economic and Social Impact of the Raupatu (October 1995)*
Maori Melting Pot (November 1996)
Was There a Treaty of Waitangi: Was it a Social Contract? (April 1997)*
Notes for a Presentation on Maori Exporting (October 1998)
Closing the Gaps: Policy or Slogan? (November 2000)
Two Great Economists: Raymond Firth (1901-2002) & James Tobin (1918-2002) (January 2003)
Rightful Owners (August 2003)*
Closing the Credibility Gap: Why Act’s Race-based Welfare Statistics Are Worthless. (February 2004)
Public Policy and the Maori. (February 2004)
Public Policy and the Maori. (March 2004)

This consists items only in the public domain, and excludes other work for iwi and government agencies.

LETTER in New Zealand Herald, 4 March, 2004.

While humorous, Paul Ekers’ Saturday cartoon of Maori canoeing back to the Pacific Islands ‘where they come from’ is seriously misleading.

The ancestors of the Maori came for overseas. They found a land rich in resources which the newcomers at first exploited. But a depletion economy is not sustainable and the newcomers evolved into a largely sustainable society with a distinctive culture and identity. The Maori did not come from anywhere else: they came from here.

The statements in the previous paragraph also apply to the Pakeha.

Money Can’t Buy You Love

This entry was posted in History of Ideas, Methodology, Philosophy, Listener on by .

Why can’t economists measure wellbeing as material wealth?
Listener 11 January 2003.

Keywords: History of Ideas, Methodology & Philosophy;

While there is considerable national agreement that economic policy should aim to accelerate the growth of sustainable GDP, Gross Domestic Product only measures material output. Its designers never not intended it to assess human welfare. As economists have known for more than fifty years, GDP is not a good measure of wellbeing. While people in cold climates have bigger fuel bills, they are not necessarily better off than where it is warm. People in insecure environments spend more on the police and military, but better to be in a secure community. Where does friendship fit into GDP? Attempts to extend the concept (to include such things as non-market activities and the environment) do not solve the basic problem that material output is not the same thing as happiness.

Alternatively, the World Values Study asked ‘are you happy’ and ‘are you satisfied with life’. (You may worry that the word ‘satisfied’ in English is not equivalent to ‘satisfait’ (French), ‘sodisfatto’ (Italian), or ‘zufrieden’ (German). However the Swiss response is substantially higher than their counterparts speaking the same languages in France, Germany and Italy, which suggests the study is measuring cultural, and not language, differences.)

In 1998 (not a year of outstanding economic performance, by the way) 95 percent of New Zealanders said they were ‘happy’, which put us second equal in the world with Switzerland and Sweden, just behind Iceland. Some 84 percent said they were satisfied with their life. That is 14th in the world – in the middle of the OECD. (Apparently there are a lot of New Zealanders who are happy, but striving for better.)

That New Zealand ranks higher on these measures than we do on per capita GDP is no surprise given the deficiencies of aggregate material product as a measure of wellbeing. There is not a very good correlation among the rich OECD countries: The responses of New Zealand and the US are much the same even though US per capita GDP is 40 percent higher than New Zealand’s. There is a relationship for those countries whose per capita GDP is less than 70 percent of New Zealand’s. In poor countries economic growth increases happiness and life satisfaction. As a country gets richer, growth does not.

Among the factors which depress the responses are being in a Communist nation, although (sadly) happiness and satisfaction deteriorated when they threw off their Communist shackles. While there does not seem to be any connection among high income countries between wellbeing and measures of civil liberties and political rights, poorer countries with democratic institutions seem to be happier. (One study reports that countries with historically Protestant elites do better than those that were Catholic. I am unsure of what this means.) Regrettably there is no investigation of the extent to which high employment and low unemployment affect happiness and life satisfaction. An eyeball over the data suggests there may be a statistically significant correlation, although the effect of superior labour market conditions may not be strong.

What this means for economic policy is that raising material output may not necessarily increase personal wellbeing. It may. More quality jobs and less unemployment does. Spending on education and health care can. Increasing individual choice seems to. (I mean ‘real’ choice. Giving a person a choice between marmite and vegemite may not make much difference.) The freedom and choice dimension is complicated. Marriage reduces options (with the exception of Bernard Shaw’s ‘combining the maximum of temptation with the maximum of opportunity’), yet married people are happier than non-married ones. This may be a particular case of the importance of relationships and communities to individual wellbeing. Almost certainly spiritual and ethical values are important, while countries with narrower income distributions seem to be happier than those where there is greater inequality.

If some forms of economic growth can enhance the factors listed in the previous paragraph, other forms can degrade them. This suggests the nation’s objective of accelerating sustainable economic growth is an intermediate target, which should not be pursued if the higher material output debases wellbeing.

This makes economic advice difficult , since economists are trained to focus on improving economic measures of material out. Not that the members of the profession are more socially maladjusted than normal, but in some ways their discipline is. Even so, we should not discount the economics disciplinary framework, for the alternatives proposed by people who claim to be free of economists’ prejudices, are usually based on worse economics.

You are probably reading this column while on holiday, perhaps after a lazy day, hopefully with friends and family. As like as not, today you have made no contribution at all towards the GDP of the nation – merely consuming without producing. Dont worry, be happy.

For past columns on wellbeing and material output

Wellbeing and Material Output (Index)

This entry was posted in Index on by .

Of Pigs and People (January 1993)
Development As Freedom: A Great Book by A Great Indian Economist (November 1999)
Value Added: The Shift To A More Socially Responsible Economic Policy Is Also Supported by Public Opnion – With Real Political Implications (March 2000).
For Better Or Worse (August 2000)
Being and Doing (January 2002)
Money Well Spent (January 2002)
Money Can’t Buy you Love (January 2003)
The Point of It All (June 2003).
The GDP Target (June 2003).
Oxytoxic Times: Emotions Are Getting in the Way of Economic Theory (December 2003).

 

High Spirits: Can We Spend and Tax Our Way to Healthier Drinking?

This entry was posted in Health, Listener, Regulation & Taxation on by .

Listener 28 December, 2002.

Keywords: Health; Regulation & Taxation;

The etching ‘Gin Lane’ by William Hogarth (1697-1764) shows an inebriated woman, ulcers on her legs from under-nourishment, her baby falling from her arms. On the steps below is the skeleton of a man – her fate too. Behind is commerce: the gin shop, the pawn shop and a funeral parlour. Above the arch beside her is written ‘drunk a penny, dead drunk tuppence, straw for free’: there was a kind of host responsibility even in 1750.

In those days, a London labourer could earn about 2 shillings a day, so a penny represented about 20 minutes work. Today a labourer on $10.50 an hour earns $3.50 in that time. On special, ‘light’ spirits (that is 23 percent absolute alcohol) sells at $7.95 for a 1.125 litre bottle, so twenty minutes work buys nine standard drinks (after income tax). The ethanol is cheap because spirits are cheap to produce, while the excise duty is levied at the same rate as for beer and wines ($21.096 a litre of ethanol) rather than the rate for full spirits ($38.422). Moreover it is levied on the basis that the 23 percent light spirits are only 18 percent: almost every fourth drink is excise duty free.

Not that most readers will have imbibed light spirits. Neither have I – for there are limits below which even a researcher need not delve. But I am told that it is liquor to get drunk on, rather than to enjoy in company. It is not certain who drinks the stuff, but you will observe empty bottles in the gutters where the young were promenading the night before.

Teenage drinking is a problem. There has been considerable concern at the lowering of the age of purchase from 20 to 18 in 1999. But their drinking was rising sharply before then. The National Alcohol Survey found the average quantity of ethanol consumed by 14 to 17 year olds doubled between 1995 and 2000. It rose for 18 to 19 year olds also, but fell for the rest of us. It is tough being a teenager as they shift from childhood to maturity. Learning to drink in a mature way must be one of the hardest parts of the transition, since their physiology and social contexts are changing (and, frankly, many of their parents dont set good examples). Providing them with cheap liquor cant help.

As well as clearing up the excise duty anomalies, should we raise the price of ethanol by raising excise duties? Curiously, it would be moderate drinkers who would pay the extra tax, since on the whole they wont reduce their drinking. However the evidence suggests the young and the heavy drinkers (typically 17 to 25 year olds drinking five or more standard drinks in a session) would cut back their consumption. Which would be a good thing, insofar as it reduced harmful drinking.

Perhaps we should change the very purpose of the special excise taxation on alcohol. In the past it has been a ‘sin’ tax to raise revenue. Drinking alcohol need not be sinful (although ‘Gin Lane’ reminds us how it got that reputation). But it can be harmful – very harmful. We should design excise duty to reduce harm, for we know that a higher price of ethanol reduces consumption, especially the most harmful consumption. If it contributes to fiscal revenue, so be it, although non-harmful drinking will pay higher taxes too.

In a way ‘Gin Lane’ is a reason for optimism. The real price of liquor does not seem to have risen that much over the 250 years, but through education and the creation of safe drinking environments and practices, consumption of alcohol today does not appear to cause as much harm as it did then, even though much remains potentially harmful. Higher excise duties are only part of the reason. To help the young we could make anyone who supplies an under-18 year old with liquor responsible for any harm the drinking causes. Responsible supply (by parents and older friends) reduces the harm the young experience, while helping them to learn to imbibe in a mature way. Additionally, we should spend more on public education, targeted at young drinkers and their suppliers, and heavy drinkers. And, yes, I personally favour higher excise duties – even though it impacts on me.

Over the Christmas holiday some immature drinkers will imbibe too much and kill or severely injure themselves or others. Some inebriated young women will get pregnant, or catch an STD making them permanently infertile. We owe our youth a better environment to learn safe, sociable and pleasant drinking. May you experience good health, good friends, and good cheer too.

The Economic and Health Status Of Households Project (Index)

This entry was posted in Distributional Economics, Health, Index, Social Policy, Statistics on by .

Keywords: Distributional Economics; Health; Statistics; Social Policy

This is a project by Suzie Ballatyne and myself based on the Household Survey, which enabled us to look at some of the relationships between health and economic status.

Executive Summary

A preliminary account of the research program is
Economic Status and Health Status Project

Two papers which report some of the findings are
Validation and the Health and Household Economy Project
and
Who Goes to the Doctor?

The final report, The Economic and Health Status of Households is available on request. Its Executive Summary is on this website, and so is Chapter 6,
Choosing Household Equivalence Indexes

Index of Distributional Economics
Index of Household Equivalence Scales

Taxing Harm: Modernising Alcohol Excise Duties

This entry was posted in Health, Regulation & Taxation on by .

Alcohol ‘is an article of human consumption which has a legitimate use accompanied by dangerous possibilities’ The Report of the Royal Commission on Licensing 1946

This is the executive summary of a report commissioned by the Alcohol Advisory Council: The views in this report are the author’s and may not be those of ALAC. The full report is available on The ALAC website

CONTENTS

SOME PRELIMINARIES (p.4)

EXECUTIVE SUMMARY (p.5) below.

PART 1: THE POLICY FRAMEWORK FOR REGULATING ALCOHOL
The Sale of Liquor Industry Act 1989 (p.13)
Alcohol Advisory Council Act (p.13)
National Drug Policy 1996 (p.13)
The National Alcohol Strategy 2000-2003 (p.15)
The Policy Framework Context (p.16)

PART 2: THE TAXATION OF ALCOHOL
The Early History of Taxation on Alcohol (p.17)
The 1958 Budget and its Aftermath (p.18)
The 1970s (p.19)
The Establishment and Development of ALAC (p.20)
The 1980s (p.23)
Report on the Review on Excise Duties on Alcoholic Beverages and Tobacco Products (The Sullivan Report) (p.23)
The 1989 Budget Reform (p.24)
The Current Excise Tax Regime (p.25)
The Treasury Views 1991(p.27)
The Taxation Review Committee 2001(p.28)

PART 3: THE ANALYTICS OF TAXATION ON ALCOHOL
The Effect of Price on the Demand for Alcohol (p.36)
Estimates of the Price Elasticity of Demand for Alcohol (p.37)
The Role of Market Prices (p.39)
Demerit Behaviour (p.41)
Externalities and Social Costs (p.42)
Irrational Behaviour(p.45)
The Distributional Impact of Excise Duties (p.47)

PART 4: SOME CURRENT ISSUES
New Alcoholic Beverages (p.50)
Legislative Changes (p.51)
Rising Teenage Drinking (p.51)
The Responsibilities of ALAC (p.53)
The Price of Ethanol (p.53)
The Fiscal Cost of Alcohol Misuse (p.53)

PART 5: SOME TAXATION ISSUES
How Can Duties Contribute to the Reduction of Harmful Drinking (p.58)
The Case for an Ethanol Based Duty Regime (p.59)
Concentration and Convenience (p.59)
Duty by Beverage Type? (p.59)
Low Alcohol Beverages (p.60)
Duty Bands (p.61)
The Problem of Taxing Wine (p.61)
The Higher Rate of Duty on Spirits and Light Spirits (p.62)
The Level of Duty (p.63)
Hypothecation (p.65)
An ACC Levy? (p.66)
The ALAC Levy (p.66)
Miscellaneous Taxation Issues (p.67)
Home Production (p.67)
Duty Free Allowances (p.67)
Business Funded Alcohol (p.68)
GST (p.68)
Indexation for Consumer Inflation (p.68)
Labelling (p.68)
Differentiating Between On- and Off-Licence Sales (p.69)
Litter, recycling and waste (p.69)

PART 6: CONCLUSION (p.70)

References (p.71)

*************

EXECUTIVE SUMMARY

Since 1989 the broad policy toward alcohol has been based upon the notion that much of its consumption is like the consumption of other products, so a well informed adult makes informed decisions as to the quantity to the be consumed and circumstances in which the consumption can take place. However, some of the consumption is potentially harmful, and there is a necessity of public intervention to minimise the harm. Regrettably, those interventions can also inhibit non-harmful drinking. Public policy therefore has to trade-off harm reduction with a reduction of moderate consumption.

The instruments of public policy to intervene have been based upon such statutes as the Sale of Liquor Act, the Alcohol Advisory Council Act and parts of omnibus acts such as the Health Act, Police Offences Act and the Transport Act. More recently they have been coordinated and prioritised via the National Alcohol Strategy.

Yet these measures need to be complemented by greater attention to the role of prices in the decision to consume liquor. Of course it has been long realised that excise taxes increase the relative price of alcohol and thereby reduce the purchases and consumption of alcohol. But there has been little attempt to coordinate them with the national alcohol strategy and its concern with harm. Insofar as there is a policy view of their purpose they remain primarily revenue raising, although their special status is justified because of the impact of the harm on the government’s fiscal position.

This report proposes that in future the primary purpose of excise duties on alcohol should be a part of the harm minimisation strategy. Setting the levels of duties still requires attention to the impact on the government’s fiscal position, but the philosophy behind the excise duty and the way it is implemented is altered if a harm perspective is adopted.

Adopting a harm approach to alcohol excise duties can reduce potentially harmful consumption, especially that of teenagers and heavy drinkers (but not particularly by chronic drinkers, except that the measures may inhibit heavy drinkers becoming chronic drinkers over time). But it cannot eliminate all harm. Effective harm minimisation involves other interventions. Those other interventions are likely to work more effectively if the excise duty strategy is supporting them.

Brian Easton,
November 2002.

The following summarises and consolidates the recommendations in the text, although not necessarily in the text order of presentation.

Principles

1. The National Drugs Strategy includes the policy objective of ‘the minimiz[ation] of harm caused by alcohol use to both individuals and the community’ where harm is defined as ‘all adverse effects or outcomes, including harm to health as well as detrimental effects on social and family relationships, loss of actual or potential enjoyment or livelihood, and economic or financial costs.’

2. The report recommends that the specific taxes and levies on alcohol be levied with the primary purpose of reducing alcohol misuse and the consequent harm.

3. A secondary purpose, which assists in setting its appropriate level, is that the taxation should enable the government to recover some or all of the expenditure outlays and revenue losses caused by alcohol harm.

The Effects of Excise Duties: How the Market Can Help Reduce Harm

4. The effect of (an increase in) an excise duty or levy is to increase the price of the alcohol on which it is levied.

5. The effect of an increase rise in the price of alcohol is to reduce alcohol consumption to some extent. The extent varies by type of drinker, by drinking situation, and possibly by the quantity drunk in each situation.

6. The biggest reductions in harm from rising alcohol prices are likely to arise from
– reduced teenage consumption;
– inhibiting moderate and heavy drinkers becoming very heavy drinkers, and
– reduced additional drinking in a session.

7. The strongest economic reasons for extra regulation of the alcohol market (including the imposition of excise duty) are
– externalities and the need to bring market prices in relation to social costs;
– the semi-rational or irrational behaviour of teenagers learning to drink, and of heavy drinkers and addicts (although the latter group may not be particularly susceptible to price signals); and possibly
– inhibiting moderate and heavy drinkers becoming very heavy drinkers and addicts.

8. Excise duties based on ethanol are probably mildly regressive, that is they probably impose proportionally more on the poor than the rich. However the biggest redistributional effect of excise duties is the transferring of spending power from heavy drinkers to moderate drinkers and non-drinkers. This transfer is in the opposite direction to the social costs where heavy drinkers impose on others. Thus the main fiscal effect of excise duties on alcohol is to offset the redistributive impact of social costs of alcohol misuse – that is to reverse (in part) the transfer of social costs which heavy drinkers impose on moderate drinkers and non-drinkers.

9. Higher prices for alcohol impact on different consumers if different ways. The evidence suggests that modest drinkers are not greatly affected, heavy drinkers may cut back their drinking by 1 percent for every 1 percent rise in price, and chronic drinkers are almost completely unaffected on average. Teenagers reduce their drinking in the face of higher prices, and it seems likely that there is less drinking in extended drinking sessions as the price rises. Higher prices may also inhibit moderate drinkers becoming heavy drinkers and heavy drinkers becoming chronic drinkers.

10. In a modern market economy, market prices coordinate the decisions of producers and consumers. To do this effectively, the prices should relate to social costs.

11. While many people are offended by excessive drinking, which in economic terms may classify it as a ‘demerit’ good, this may not be a compelling reason for rasing alcohol prices.

12. While there is some irrationality (or quasi-irrationality) among some alcohol consumers and on some occasions, it is not evident that price policies are particularly helpful in reducing harm from this course. Insofar as irrationality is a problem, other interventions need to be pursued. The report notes however, that teenagers who are being socialised into moderate drinking need special attention.

13. Alcohol is one of a handful of products, where the costs of production do not roughly reflect the overall costs to society of consumption. The excess social costs are substantial. The most comprehensive estimate suggests that alcohol misuse reduces effective GDP by 4.0 percent, may well reduce the effective size of unmeasured (informal) economy by a similar amount, and has also reduced the welfare of New Zealanders via additional mortality and morbidity by 2.0 percent and the population of New Zealand by .8 percent.

14. The excess social costs may be thought of as the economists’ equivalent of harm, in which case the objective of alcohol policy in economic terms is to reduce social costs. Reducing the gap between the prices which individuals make their alcohol consumption decisions and the social cost to the economy will reduce harm, because individuals are less likely to partake of potentially harmful consumption.

15. It is not practical to require alcohol consumer to pay an appropriate insurance for the social costs they may incur with each drink, since the payment would vary markedly by the personal characteristics of the consumer, the drinking situation, and the number of drinks recently consumed. Excise duty is an imperfect practical alternative to the ideal. It will not eliminate all potentially harmful consumption..

16. While the idealised insurance system would generate exactly enough revenue to cover the excess social costs, that rule does not apply for across the board levy. There is even an argument that the levy should generate more than the excess costs, because it should be struck at the level reflecting the most harmful drinking on the margin rather than the average drinking which is less harmful.

17. While a lift in alcohol excise duty will raise prices for all drinkers, many will be better off, insofar as the resulting tax revenue will be recycled back. Under some assumptions, over 70 percent of adults will be better off as a result of this recycling (and also from reductions in harm). This is because heavy drinking is concentrated in a small part of the population. They will be made worse off as a result. On the other hand heavy drinking is the main source of harm, and so the heavy drinkers would be paying for a greater share of the harm they generate.

New Issues

18. Among the new issues facing strategies to reduce alcohol harm are new beverages, and new legislation which liberalises access and attitudes to alcohol. Excise duties probably can do little to assist with any potential harm these may generate, but it is noted that while in principle ALAC has some of the relevant interventions to meet these challenges and that of rising teenage drinking, it has not had an increase in its funding relative to inflation since 1991.

19. A major new issue is the rising incidence of teenage drinking over the last decade, and the clear evidence that much of its is potentially harmful. Teenagers are sensitive to higher prices. Higher excise duties would reduce their potentially harmful consumption, while they learn to drink like mature adults. (The report also notes that there is also considerable heavy drinking by adults in their early twenties, which would also be reduced by higher excise duties.)

20. A second new development is the introduction of new beverages, for which the cost of ethanol is exceptionally cheap. The report describes light spirits for which the price of a 1.125 litre bottle is as low as $7.95. (If they were selling ethanol at the same market price, a dozen 330 ml cans of beer would cost $6.33, a 750ml bottle of wine would cost $2.76, or a 1.125 litre bottle of spirits would cost $12.85.) Cheapness of light spirits arises from the low excise duty on spirits below 23% aabv, an anomaly in the levying regime (duty is on the basis that the liquor has 18% aabv although the actual aabv is 23%) and the low cost of production.

21. Indicative figures suggest that revenue from excise duty on alcohol does not even cover the costs incurred by the public health sector in dealing with alcohol harm, and may cover only a fifth to a quarter of gross fiscal costs.

22. It is recommended that government agencies be required to regularly estimate the costs they incur dealing with alcohol harm.

The Proposed Excise Duty Regime

23. An excise duty on alcohol can contribute to reducing harm from alcohol misuse by raising the minimum price of alcohol, thus reducing consumption by teenagers and heavy drinkers, and inhibiting the creep of moderate drinkers into heavy drinkers and to chronic drinkers. However, ideally the excise should not impact moderate drinking which is not potentially harmful. In practice this impact cannot be eliminated but it can be moderated by choice of the duty regime.

24. The most effective excise duty with the purpose to reduce harm is likely to be one which is levied on ethanol (the quantity of absolute alcohol), and is particularly concerned with the minimum price of alcohol. A particular merit of this levy regime is that it impacts relatively less on high value (relative to ethanol content) drinks.

25. A strategy which focuses on the minimum price of ethanol requires regular collection of pricing data. Statistics New Zealand should be commissioned to collect the data, as a part of its regular price collection program.

26. It is possible that the excise duty on ethanol could be supplemented by duties based on containers, concentration, or on any other chemical identified as harmful. However, not enough is know about these to justify any positive recommendation.

27. A strategy based on ethanol content would not normally need to differentiate between type of beverage. However the difficulties of assessing the ethanol content of wine requires a modification to the general principle and, as explained in paragraph 30, there is a case for a differential between spirits and the rest to minimise the impact of the excise on moderate drinking.

28. Very low alcohol beverages should be exempted from excise duty on the basis that their consumption causes little harm (as well as reducing compliance costs). Subject to them not being able to be cheaply distilled back to a higher level of ethanol concentration (which would undermine the tax base and could add to harm) it is recommended that beverages with an aabv below 2.5 percent be exempt. (The 2.5 percent comes from definition of low-alcohol beverages used by the Australian and New Zealand Food Authority Regulations.)

29. As far as is practicable, ethanol should be levied on actual content, and the excise rate should not based on duty bands. Where duty bands have to be used, the within band rate should be set at the top of the band in order to avoid suppliers avoiding actual taxation on ethanol content.

30. That bulk wines be taxed at the actual ethanol content or, where that is impractical, at the top of the band. High value wines (say, above $12.00 a litre for production costs plus GST) would be taxed at a set rate independent of their alcohol content – currently $2.1096 a litre. Similar principles should apply to fortified wines and liqueurs.

31. Distilled spirits (especially light spirits) can be produced at a considerably lower cost than other forms of alcohol. In order to maintain realistic minimum levels for the price of alcohol, either the base excise duty rate for all alcohol has to be raised, or a differential maintained between spirits needs to be introduced. This report recommends the latter option. The recommended differential is lower than the current differential of $17.32 for full spirits and would result in a reduction in their prices, but it would raise the price of light spirits.

32. The application of the rates based on the principles in this report (including raising the excise threshold, lowering excise duty on spirits, increasing it on light spirits, and a better application of the existing rates) will not alter revenue by much. The proposals are essentially a rebalancing exercise, to reduce harm.

33. The base level for excise duty is a political judgement to be made through the parliamentary process. That it is a political judgement suggests the need for a wide public debate on the appropriate excise duty rate. An important consideration in setting the base rate is the extent to which the total excise duty should contribute to gross fiscal costs of alcohol harm.

34. However, it would be understandable if the government decided to recover a high proportion of the fiscal costs generated by alcohol misuse by a higher excise duty rate. At the same time that would reduce alcohol harm, while the additional revenue could be recycled for priority fiscal purposes.

35. To assist the public discussion an example is given below of the impact if the excise duty was increased the report explores an increase of $6.00 a litre of ethanol (exclusive of GST), which would be about the amount to require the excise levy covered public health costs generated by alcohol misuse. The additional revenue would be about a $120m a year.

Hypothecation

36. The report does not recommend further hypothecation, that is the practice of tying revenue from a taxation to a particular spending program. This is under consideration by the government at the moment (in regard to a health levy), and the issue may be revisited after the decision is made. The report does, however, look at some existing hypothecation.

37. The Accident Compensation Commission already levies various activities to fund its program. It should be invited to consider whether it should place a levy on ethanol, reducing its other levies

38. It is recommended that ALAC should receive an increase in its levy revenue to enable it to more vigorously contribute to a reduction in harm from teenage drinking. As far as possible, the levy should be on ethanol content in parallel to the excise duty.

Miscellaneous

37. Until there is evidence of home production causing significant harm it is unnecessary to impose excise or other special duties on it.

38.The international practice where alcohol is not included in the de minumus (where the duties and indirect taxes in imported goods for personal use are exempt from a levy up to $50) should be followed (as it is for tobacco). Whether the duty exemption for Trans-Tasman travellers is consistent with Closer Economic Relations between Australia and New Zealand should be reviewed.

39. There is a need for a continuation of a vigorous host responsibility program for businesses which supply their staff with free liquor, given that any price restraint to harmful drinking does not apply.

40. GST should continue to be levied on excise duty to simplify compliance costs. As a general rule the statements about excise duty should be explicit whether they include or exclude GST.

41. The regular adjustment of excise duties to changes in consumer prices should be continued (and the practice applied to spirits if the new lower rate is introduced). However, every three to five years the levels should be reviewed for the effect of economic, fiscal, and social changes other than inflation, with particular attention to the minimum cost of ethanol.

42. The voluntary labelling regime needs to review the information displayed about alcohol content (Including on websites and in advertisements). Business may chose to include excise duty information on the label if they wish.

43. While there is a case for on-licence sales to be excised at a lower rate than off-licence sales, there seems no practical way to do this.

44. Litter, waste, and recycling issues need to be addressed as part of a comprehensive program for all litter, waste and recycling, rather than specifically for alcohol.

Summary

45. The main argument of this report is that excise duties on alcohol should have the primary purpose of reducing harm, but that also entails contributing to the gross fiscal costs the harm generates.

46. In the course of this report, the application of the principles have resulted in some recommendations to the excise system. The main changes are summarised in the following table. The last column indicates the impact were the government to require the revenue from the excise duty on alcohol to cover the full costs of the public health system caused by alcohol misuse.

Summary of Recommendations on Excise Duties

Price increase as a result of rebalancing and reducing harm

Beer
Low Alcohol (2%aabv) 12c a 330 ml can lower
Other (4% aabv) No change
Wine
Bulk (13% aabv) 71c a litre higher
High Price No change
Spirits
Light (23% aabv) $5.22 a 1125ml bottle higher
Full (37.2% aabv) $1.83 a 1125ml bottle lower

Note: The changes are excise duty impact only. Suppliers may also change their margins in response.

Further price increase if duty increased by $6.00 a litre of ethanol.

Beer
Low Alcohol (2%aabv) No change
Other (4% aabv) 9c a 330ml can higher
Wine
Bulk (13% aabv) 88c a litre higher
High Price 66c a 750ml bottle higher
Spirits
Light (23% aabv) $1.75 a 1125ml higher
Full (37.2% aabv) $2.83 a 1125ml bottle higher

Note: The changes are excise duty impact only. Suppliers may also change their margins in response.

Different Kinds Of Countries and Cities: The Distances Between Them.

This entry was posted in Globalisation & Trade, Literature and Culture on by .

Cultures of the Commonwealth The Urban and the Rural No 9, spring 2003, p.25-35.(1)

Keywords: Globalisation & Trade; Literature and Culture;

Geoffrey Blainey titled his seminal history of Australia The Tyranny of Distance, arguing that

In understanding Australia’s history, the idea of distance may be as revealing as say Frederick Jackson Turner’s ‘frontier theory’ is in probing the history of the United States. Distance – or its enemy, efficient transport – is not simply an explanation for much that happened in Australia’s history. Once the problem of distance is understood it also becomes difficult to accept many of the prevailing interpretations of other events in Australia’s history. Distance itself may not explain why they happened, but it forces a search for new applications.(2)

He could have said the same for New Zealand. For if external distance tyrannised Australia, New Zealand was more distant – even from Australia. (The physical distance from Canberra to Wellington is roughly the same as from London to Moscow.)

However the internal distances are different in the two countries, for New Zealand is relatively compact, and even though the terrain can be rugged, its interconnectedness is simple compared with Australia. (Canberra is physically closer to Wellington than to Perth.) Perhaps for an Australian, New Zealand hardly has a countryside. Perhaps its internal smallness made New Zealand a kinder gentler society, compared with the vigorous masculinity of Australia. But for a New Zealander the distinction between country and town is (or was) clear enough.

This difference is only a part of the geographical divisions that New Zealand experienced. The preface to Blainey’s first edition ends pregnantly

‘It may be that distance and transport are revealing mirrors through which to see the rise of every satellite land in the new world, because they keep the land’s vital relationship with the old world in the forefront.’ (italics added) (3)

Distance allowed the new world nations to develop in distinctive ways and yet the countries could never entirely ‘distance’ themselves from the centre (even though the location of the centre changed). The image of mother and daughter countries to characterise Britain and some of its colonies may be useful for the nineteenth century, but mothers die, while countries and culture transform. Today it is not ‘Mother Britain’, but Britain as a cousin to Australia and New Zealand with a common eighteenth century British mother Moreover, the generations have bred other cultures into the family tree, so Aborigines, Asians, Continental Europeans, the Maori and Pacific Islanders mean that Australasia has an increasingly different heritage from ‘Mother Britain’. But so does cousin Britain. Even so, the town and country in New Zealand can not be divorced from metropolis and colony.

At first the colony was only countryside. There are records of cows grazing in Christchurch’s Cathedral Square in the 1850s. It was not unusual for town sections to be sold with a block of grazing land. The town was the centre where the country dwellers congregated, without any other economic or social significance. Its local industry was the servicing of farm (or other resource) industry needs, and a little simple processing before export. It was a port or other transport hub, shipping out produce and bringing in imports for consumption and investment.

Initially the European-based economy was not even sustainable, as it ‘quarried’ whales, seals, fish, timber, and minerals. Even much of the early farming was impermanent as the soil exposed after burning off the bush was washed to the sea . One might speculate – Maori aside – that New Zealand could have ended up a larger version of the Falkland Islands, dependent upon large sheep farms and wool exports (with a little tallow and canned meat). Early in its European history it was a colony of exploitation rather than a colony of permanence.(4)

This limited prospect was transformed in 1882 when the first refrigerated meat was shipped to Britain. Distance became less tyrannical, as the cost of shipping meat and, later, dairy products to the other side of the world, diminished greatly. It was not only freezing technology that made this possible. Steel-hulled, steam-driven ships transported the produce, and telegraph integrated the information between markets. New Zealand developed into a staples economy based on an extraordinarily efficient processing of grass into food and fibre which were shipped to the other side of the world.

The towns, some to become cities, remained essentially farm servicing centres. Some manufacturing even died as it became easier to source from overseas. Others businesses consolidated into the larger (and growing) cities, as a better internal transport and communications infrastructure enabled the reaping of economies of scale. Even so, the cities remained between the countryside which produced the exports and the metropolis which consumed them.

Gradually, the cities began to have a presence of their own. Increasing market size enabled them to replace some importing, while their service sectors grew. Sometime in the middle of the twentieth century – there is no identifiable date as precise as the day the first frozen mutton was exported – the cities began to see themselves as separate from the countryside, both as cultural entities and business centres. Of course there was never a complete separation. Within the city boundaries a lot of commercial activity was centred on the countryside, and additional rural visitors often made the cities’ cultural activity viable.

In some respects the figures in Table 1 underestimate the trajectory of urbanisation of New Zealand, since the cities of the nineteenth century and early twentieth were far more country oriented than today. Even so the pattern is clear. The population has become increasingly urban, and increasingly living in the largest urban centres. During the nineteenth century more than half the population lived in rural centres, by the end of the twentieth century more than half lived in the five largest centres (Auckland, Wellington, Christchurch, Hamilton, Dunedin). The rise of Hamilton is especially dramatic. In the 1880s, before the dairying boom, the town was struggling with a population near 1000.

Table 1: Percentage in Urban Centres: 1881-2001.(5)
(Note that prior to 1931 the data series excludes Maori).

Year Urban Largest 5
Centres
1881 40.1 n.a.
1891 43.4 25.6
1901 44.0 28.9
1911 50.4 31.5
1921 56.2 36.7
1931* 68.0 39.6
1941** 70.0 38.9
1951 73.8 43.3
1961 76.4 44.5
1971 81.5 49.8
1981 85.4 50.9
1991 85.5 52.0
2001 85.7 54.1

* Average 1926 & 1936; ** Average 1936 & 1945.

Table 2, showing the industrial structure of the labour force, tells a similar story. In the nineteenth century those in the primary sector (mainly farmer and miners) dominated those in the secondary sector (mainly manufacturing). There were roughly equal in numbers in the first third of the twentieth century, but from its middle the secondary sector grew more quickly, and by 1981 it was three times the size of the stagnating primary sector employment (now farmers, forestry, fishing and some miners). In an important respect this does not capture the country-city divide, because a significant component of manufacturing was primary product processing (dairy factories and freezing works) located near the farms.

Table 2: Industrial Structure of New Zealand Work-Force: 1851-1981 (Percentage).(6)
(Note that prior to 1931 the data series excludes Maori).

Year Primary Secondary Tertiary
1851 37 24 39
1861 54 11 35
1871 56 13 31
1881 42 23 35
1891 40 25 35
1901 36 28 36
1911 32 28 40
1921 30 27 43
1931* 30 30 40
1941** 25.2 29.9 44.9
1951 19.4 33.9 46.7
1961 15.3 36.0 48.7
1971 12.2 36.7 51.1
1981 11.6 34.0 54.4
1991 10.3 26.6 63.1
2001 8.7 25.4 65.9

* Average 1926 & 1936; ** Average 1936 & 1945.

The history of the political parties repeats the story. Parties did not really exist before the 1890s, with government dependent upon (often fragile) alliances based on personalities and sometimes policy issues. The Liberal Party is essentially a creation of the social transformation following 1882, and its opposition Reform Party developed at the turn of the century. In a country dominated by its countryside they were both essentially farmer parties, the distinction being the Liberals supported the lease-holding of land, Reform the free-holding (although at some stages they were also distinguished on a progressive-conservative axis). The Liberals began with a small workers’ wing, which drifted away to set up its own Labour Party in the 1910s. By then Liberals and Reform were in joint government during the First World War, again joined in a coalition government in 1931 and amalgamated into the today’s National Party in opposition after 1935. Meanwhile Labour slowly grew as a city-based party, although when it came to power in 1935 it still depended upon winning rural seats. Political party specialisation by regional interest was never perfect, for the income dimension was also important. So while the Labour Party was centred on the cities, it also had to win some (poor) rural parliamentary seats (as well as the Maori ones) while National, the party of the countryside, won a few (wealthy) urban seats. The parties interfaced at provincial towns ambiguously located between city and country side.(7)

The economic policy debate began to centre around the issue of protection. From the purely economic perspective, the argument was about the extent to which a tariff or import control would or would not promote economic output; from the political perspective it was the extent to which protection could and should be used to redistribute income (and security) between the export sector (pastoral farmers) and the domestic sector (workers and import substituting manufacturers) – between country and city; from the cultural perspective it was about the destiny of New Zealand.

The cultural challenge was captured by Bill Sutch’s dichotomy of ‘Colony or Nation’, in which he posed two broad strategies for New Zealand: the first to remain a supplier of commodities to the metropolis coupled with a derivative-dependent culture; the second was to have a degree of national independence by not being too heavily dependent upon particular overseas markets and to have a parallel diverse and independent culture.(8) Any dichotomy fails to capture the full complexities and ambiguities, some of which will be teased out shortly. But for immediate purposes this analysis adds the foreign metropolis as a third part to the country-city dichotomy While the geographic distance between New Zealand city and country was short and the other two legs of the triangle long, the perceptual distances were more equal.

As late as 1981 the triangle was evident when the nation split over a rugby tour (‘The Tour’) to New Zealand by from the then apartheid-divided South African Springboks.(9) It was perhaps as close in recent times that New Zealand came to civil war – with families divided on the issue. Nominally it was about whether sport and politics should be separated (as one side put it) or whether a racially selected team was acceptable (as the other side argued). The conflict included demonstrations outside the grounds when the games were played, and protests within. The police took on a military demeanor and some protestors responded in kind One game was called off, another cancelled. In one family I know of the father attended every game he could, while his daughter demonstrated out side (and the mother, more sympathetic to the daughter’s views, nevertheless did her best to keep the peace). The post-event trauma echoed in life and politics for at least a decade until apartheid collapsed.

The conflict reflected all sorts of divisions in New Zealand society but a particularly significant one was the Zeitgeist about one’s relation with the world. The anti-Tour group centred on the cities wanting to prioritise a vigorous anti-apartheid line independent of the weaker stance many other nations had taken, and the pro-Tour group centred in the countryside, following the official British lead, happier to leave aside the complexities of the foreign policy and get on with the game, as at happened when previous racially selected Springbok teams had visited New Zealand. That there was a substantial city-country difference is indicated by the voting in the 1981 election later in the year, when the countryside swung back towards the incumbent National government and the cities moved further towards Labour.(10)

However, the dichotomous world of the Sutchian analysis was dying. His book Colony or Nation was published in 1965 when Britain took around two-thirds of the New Zealand exports. The collapse in wool prices at the end of 1966 (and the ongoing weakening of the price for other pastoral exports throughout the post-war era), reinforced by the entry of Britain into the EEC in 1973, diminished markedly its significance as a New Zealand export market. (Because most New Zealand wool is derived from crossbred sheep, a fall in its price impacts on sheep meat production too.) (11)

Today the British market takes a smaller share of New Zealand exports than Australia, the US, Japan, and China including Hong Kong, with South Korea close behind. (In terms of total exports the European Union is second only to Australia (17.5 percent vs 19.0 percent). However the EU is not generally treated by New Zealanders as a single economy, so that each European country’s market is thought of as separate. Given that in the mid 1960s the EU countries including Britain were taking about 85 percent of New Zealand’s exports (the continent mainly took wool), the decline over the 35 years is equivalent to losing the British market of almost 65 percent of total exports.)

What drove the change was not so much export market diversification, but export product diversification which required the new markets. In terms of both export product composition and export market concentration New Zealand diversified more than any other OECD country in the 1970s, although the exports continued to be dominated by commodities – energy, fish, forestry, horticulture – with some general manufacturing and tourist services. The diversification impacted on the structure of the economy requiring new regulation, which was one of the pressures for the economic reforms of the 1980s. In particular, the very centralised control of the first three decades after the war proved inflexible as the economy diversified.

Socially New Zealand was also changing. The hegemony of a European masculine, middle aged, and ultimately puritanically repressive society was being undermined by the recognition of diversity, most obviously by the feminist revolution and the changing ethnicity. (After the war the Maori shifted from a primarily rural to an increasingly urban location, Pacific Islanders were arriving, as were Asians – themselves a diverse lot.) New Zealand not only became a more tolerant society, but increasing affluence shifted it from a one-style-suits-all department store to a boutique supply of private and public goods and services. (For instance there is now a multitude of radio stations targeting a variety of ages and tastes.)

The sources of overseas culture were diversifying. Films had been sourced from America from the 1920s. After the war the US became increasingly important as a cultural source, while the British share diminished (although some British institutions – notably the BBC – continue to loom large). As early 1941, following the fall of Singapore, New Zealand foreign policy began to shift from the diminishing British ambit to one based on the US and Australia. (However with its Asian preoccupations Australia is much more US aligned than South Pacific-focussed New Zealand. Multinational agencies such as the UN are also a more important element in New Zealand’s overall strategy.) From the 1960s the New Zealand academy began to draw from the US with its graduate students increasingly going there in preference to Britain (and a few going to other academies, such as those in continental Europe and Australia). The economic diversification came last.

Norman Kirk’s term as (a Labour) prime minister from November 1972 to August 1974 (he died in office) accelerated the shift from New Zealand as a British colony to a Pacific nation (although Britain entering the European Union in 1973 contributed too).(12) It is easy to argue that it really involved a change from dependency on one imperial power – Britain – to another – the US. But such is the US dominance of the world in the second half of the twentieth century, that may be true for almost every country.

Rather than pursue the general issue, even through the exemplar of New Zealand, it seems more fruitful to observe that the world of which New Zealand was a part was increasingly different from that of the nineteenth century in which it was founded. The cost of distance was diminishing dramatically, which meant that the colony-nation dichotomy which Sutch proposed and Kirk seemed to resolve was becoming more complex. For if New Zealand, like Australia, was founded on the tyranny of distance, what happens as distance becomes less tyrannical?

While New Zealand’s relation with its external environment changed as effective distance changed, there was also an impact on the internal one. Consider the case of rugby, which was once THE national sport. Today New Zealanders avidly follow a variety of sports, a change partly reflecting the social diversification in other aspects of New Zealand life (the women’s national sport is netball), but also the opportunities global television offers armchair spectators. Even so, rugby remains the most important organised sport, and it could still – as occurred in 1981 over the ‘The Tour’ – split the nation.

In an insightful analysis first written about the time of the Tour, sociologist Geoff Fougere pointed out that there was a sense in which non-Maori New Zealand was organized on a tribal basis, with domains based on the rugby football provinces.(13) The factors which determined the regions included community of interest, geographic integration, (for club teams would not want to travel too far), financial viability, and a size sufficient to be able to compete effectively against others. The regional structure of unions evolved, but the evolution reflected changes in the ‘tribes’ with amalgamation among smaller adjacent ones and divisions in the growing Auckland one.

Today the provincial rugby unions still exist, but overlaying the 28 provinces are now five super-provinces: represented by the Auckland Blues, Waikato Chiefs (also partly based on Auckland), the Wellington Hurricanes, the Canterbury Crusaders, and the Otago Highlanders. Their existence is a result of the Super-12 competition played in early winter between teams from Australia, South Africa, and New Zealand. Various factors are creating this new competition. It would, of course, be impossible had South Africa not abandoned apartheid and rejoined world society. It involves only Southern Hemisphere teams, reflecting its seasonal cycle. But crucial has been the reduction in transport which makes the competition logistically possible and in communication costs with their creation of new profitable mass-markets. They have diminished the effective size of the world, so that the international competition is funded by the global television audience, with gate takings now secondary. (A minor, but illustrative, change is that today even local games tend to be played in the evening because it provides a bigger international TV audience. Because evening conditions are different from the day game, players have had to adapt their style and skills.) There remains a National Provincial Competition, now in three sections with the city teams clustered at the top and the rural ones in the lower divisions. Power in rugby, as in other parts of New Zealand life, is today located in the financial dominance of the cities.

The technology and market processes transforming premier rugby are the same as those driving the globalisation of the world economy. They are also transforming our community geography. The small intimate areas which once reflected tribal allegiances are being replaced by grander city-based super-provinces, although possibly most New Zealanders still have particular rural localities that are precious to them. Significantly, the location is sometimes described by a Maori term: the turangawaewae – the place where one stands (proud and comfortable). The myth of rural New Zealand looms large in the national psyche. But so does the sea for there is so much coast and so much sea beyond – to the nearest neighbours and the metropolises.

But if the physical distances are the same (or altered insofar as the balance between the metropolises are altered), the cost of distance diminishes, albeit more for persons and information, than for goods. Many New Zealanders read the London and New York Times on their internet screens before the local subscribers obtain their hard copies. The millionaire owner of New Zealand’s international rugby league club (its team, the Warriors, plays in an Australian competition) lives in Britain, after having lived in New Zealand until recently, but flies the halfway round the world to see them play major games. The trip of just over 24 hours is probably not much more demanding than that made by a nineteenth century country squire travelling to town.

At one level the transformation for a New Zealander is no different from anywhere else: there are useful parallels to be explored with the Scots and Irish (and perhaps even some of the English provincials) in relation to England and the Canadians and the Australians in relation to the US. Yet the transformation is also unique to each. New Zealand has its own geography, vegetation and climate. Its English speaking history is now a solid two centuries old, and is being steadily recalled and written up; the Maori have been there for 1000 years and have evolved a creative synthesis of their traditional way of life with Western culture; there is the increasing importance of Pacific Island and Asians (and not uninfluential minorities of others with European heritages, most prominently Jews). Already there is a melding of these cultural strands. Inter-marriage is not unimportant – over half the children born in 2050 are expected to be part Polynesian.

Moreover, New Zealand’s geopolitical interests are very different – even from Australia – and its economy is likely to remain distinctively different. All these factors suggest that New Zealand culture could remain vigorous and, to some extent independent, in the way that Sutch hoped, especially as while effective distance may diminish, it will remain for New Zealand significant compared to most countries.

For despite the dominance of the US, the world is increasingly polycentric, so that Sutch’s colony – a country subservient to a single power – seems less likely. On the other hand, his yearned for possibility of a totally independent nation seems as unlikely in a multilateral world with its network of obligations and interconnections.

What Sutch feared most was the cultural cringe, the situation where New Zealanders so lacked confidence in themselves, their standards of achievement would be set in the offshore metropolis with an outcome which was insipid colonial imitation. This may not be true in most arts, but in other intellectual pursuits – notably economics – the cringe dominates: far too much economic policy uncritically uses the US as a model.

Perhaps the colony or nation options are not as finely balanced as Sutch thought in 1965 although their meaning has to be updated for world where effective distance is smaller and continuing to diminish.

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Endnotes
1. I am grateful for Francine Toleron for comments on an earlier draft.
2. Geoffrey Blainey, The Tyranny of Distance, Sun books, rev ed 1983, p.ix.
3. ibid, p.x.
4. Brian Easton, In Stormy Seas: The Post-war New Zealand Economy, University of Otago Press, 1997.
5. Population Censuses. Until 1921 urban was based on cities and boroughs. From 1926 urban was is based on urban areas and towns with over 1000 population.
6. Brendan Thompson, ‘Industrial Structure of the Workforce’, The Population of New Zealand, Country Monograph Series, United Nations Economic and Social Commission for Asia and the Pacific, United Nations, 1985. Also Brian Easton, ‘Brendan Thompson’s New Zealand Work Force Series’, Series’, Labour Employment and Work in New Zealand: Proceedings of the Seventh Conference, Department of Geography VUW, 1997, p.277-285. 1991 and 2001 spliced from Population Census.
7. Robert Chapman, Keith Jackson, & Austin Mitchell, New Zealand Politics in Action: The 1960 General Election, Oxford University Press, 1963. Also Brian Easton, The Political Economy of Robert Chapman, 2002.
8. Bill Sutch, Colony or Nation, Sydney University Press, 1966.
9. Geoff Chapple, 1981: The Tour, Reed, 1984; Trevor Richards, Dancing On Our Bones, Bridget Williams Books, 1999.
10. Alan McRobie, ‘1981: A Win is a Win is a Win’, in Stephen Levine & Alan McRobie, From Muldoon to Lange: New Zealand Elections in the 1980s, MC Enterprises, 2001.
11. Brian Easton, In Stormy Seas: The Post-war New Zealand Economy, University of Otago Press, 1997.
12. Brian Easton, The Nationbuilders, Auckland University Press, 2001.
13. Geoff Fougere, ‘Sport, Culture and Identity: The Case of Rugby Football,’in David Novitz & Bill Willmott.(eds) Culture and Identity in New Zealand, GP Books, 1989.

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Working Smarter: Is Our Workforce Skilled Enough to Compete Globally?

This entry was posted in Education, Labour Studies, Listener on by .

Listener 14 December, 2002.

Keywords: Education: Labour Studies;

Instead of the five percent downtime the manufacturer specified, the expensive German machinery was malfunctioning at four times that rate. The increasingly frustrated management called in its workers, who explained they had never had any training on the use of the machine. The German manufacturer would have been astonished. Their view is that each worker was a skilled technician who had a positive role in managing the machinery, not someone to do the jobs that the machine designers had not yet automated. Training for a new technology would have been routine.

This might explain why Germany has a better productivity record than Britain. By most measures British science far out performs Germany (and most other nations). But the Brits do not have the same technological superiority. The Germans probably do better because they have a better trained workforce.

Ware putting a lot of effort in improving the transmission of research into business applications. But how good are businesses at transmitting the new technologies into practical applications? Our greatest success is down on the farm. It is not just them mechanically applying someone else’s theory – doing what they are told. The theory has to be adapted, for local conditions, just like the workers with that German machine.

Because workers dont register patents and because shopfloor (or farm) adaptation is difficult to measure, we can underestimate its significance. Even so, a US study found a fifth of all patents come from supervisors, engineers and scientists at the operating end of industry (two fifths comes from industry R&D teams and two fifths from independent inventors). What would the proportions be if the blue collar workers registered their improvements?

To manage advanced technologies effectively workers need understandings and skills. The first requirement is formal tertiary training. With 36 percent of our 25 to 64 year olds with post-secondary qualifications, New Zealand is near the top of the OECD, where the average is 26 percent. (We are third equal behind Canada and the US.) However our strength is in certificates and diplomas. Only 14 percent of the age group has degrees or higher, compared with the OECD average of 15 percent. (Our average adult literacy levels were only middling according to the 1996 international literacy survey. However, the high survey response rate of New Zealand (and Australia) compared to most other countries, probably biases our outcomes down. So we are almost certainly above average in the literacy stakes too.)

Even more worryingly, we may be slipping behind. In terms of the youngest group, the 25 to 34 year olds, we are only plumb middle of the OECD rankings of those with some tertiary education.

There is also a need for on-the-job upskilling. The farm sector labour force is relatively underqualified (although probably better than any of its foreign competitors). Its formal deficit is offset by a sound core education, and an impressive knowledge transmission system based on meetings, field days, and the media. Professional workers often have upskilling as an integral part of their work process. But opportunities are rarer for blue-collar workers, and those with poor qualifications are the least likely to engage in further education and training. The OECD reckons that over a life cycle the average New Zealanders get about 1714 hours of training outside formal education. This is just below the OECD average of 1730 hours, topped by Finland at 3876 hours.

So it is not just a matter of better opportunities for those leaving secondary education. It is sobering that over 60 percent of the labour force left school before the personal computer was important; over 90 percent before Bill Gates declared the internet was crucial. Even so, a significant chunk of New Zealanders acquired computer and web skills, one way or another, coupling sound secondary school foundations with formal, informal, and on-the-job learning. How much of this occurred by serendipity and the New Zealanders’ ‘can-do’? How much have we built an upskilling strategy into our labour force policies?

The New Zealanders most likely to be on the shop floor (such as Polynesians) have relatively poor secondary educational achievement. So we do not really face a tradeoff between an ‘equity’ strategy of supporting the weakest educationally against an ‘efficiency’ strategy of putting the money into other parts of the education system. Getting our educationally weakest up to the international standard will improve the nation’s ability to operate advanced technology at the shop floor.

And if we do not? Not only will we have poor technology implementation, and lower productivity growth. In the harsh world of mobile international capital looking for the best place to locate their businesses, the quality of the workforce matters. It can matter more than rates of remuneration. Who wants to entrust the application of an advance technology to neophytes?

The Air New Zealand-Qantas Merger: an Application in the Public Interest?

This entry was posted in Business & Finance on by .

Paper prepared for Debate Air New Zealand.

Keywords:Business & Finance;

Major factors in the background to the proposed merger between Air New Zealand and QANTAS are the Australian reneging on its open skies agreement with New Zealand, so that Air New Zealand does not have simple access to the Australian domestic air travel market, and the subsequent hurried – and with hindsight, foolish – purchase of Ansette Australia by Air New Zealand to obtain that access. I draw two immediate and relevant conclusions:

First, the Australian government was very willing to bully New Zealand when it thought it was in the Australian interest.

Second, hurried decisions are not necessarily good ones. That applies to the earlier merger as much as it does to this proposed one. As I understand it, Debate Air New Zealand is anxious that the merger be evaluated carefully, and not hurriedly and casually – certainly not as casually as the Air New Zealand-Ansette merger was. I agree.

The merger process goes something like this:

Next week the government of New Zealand gives its approval for the merger process to proceed. As the majority shareholder of Air New Zealand, its permission is required. However the approval should only be in terms of the narrow criteria of the New Zealand government as a shareholder. The government would be wise not to make any reference to the merger being in the public benefit.

There are two reasons for this. First it has not yet the comprehensive information to make the decision, and even if it had, a decision next week would be too hurried.

The second reason is that the merger decision then goes to the Commerce Commission for approval. The Commission will almost certainly conclude the merger will result in market increased dominance by the merged airline as far as the New Zealand domestic air travel market is concerned. Normally that would mean it would refuse permission for the merger.

However Section 36(8) of the Commerce Act 1986 states (after removal of some of some of the weighty – but for these purposes unimportant – caveats in order to get the main idea across) that

“The [Commerce] Commission shall grant an authorisation [to merge] it is satisfied that the merger …. if implemented would result in … a benefit to the public which would outweigh any detriment to the public which would result … any … strengthening a dominant position in a market.”

Were next week the government to approve the merger proceeding on any wider criteria than its shareholding interest, it would be saying something about the public benefit. As pointed out above, it is not in a position yet to make that judgement about the public benefit, but even were it, any public statement could be interpreted as an improper influence on the judicial procedure which the Commerce Commission is undertaking. Thus, next week the government needs to give the absolute minimum approval to go on the next step.

We cannot tell whether the Commerce Commission will conclude the public benefit outweighs the detriment from the increased market dominance. But I think we can say a couple of things.

The first is that the Commerce Commission is not well placed to make such an important decision. It is designed for dealing with much smaller mergers. That was the conclusion that the government came to in regard to the dairy industry merger which led to Fonterra. It took the merger decision out of the hands of the Commission, and made it a parliamentary one by special legislation. We can argue whether the ANZ-QANTAS merger is larger or smaller than the diary industry one. However they are the same order of magnitude, and the conclusion, that the Fonterra decision was too big and complex for the Commerce Commission, broadly applies to the ANZ-QANTAS merger.

The second problem that the Commerce Commission faces is that it is both the judge of the applicability of Section 36(8), and also has the function of testing the quality of the evidence. The merger partners will put forward a case that the merger is in a public interest. But there is no mechanism by which the case can be evaluated independently before the Commission.

What is needed is that there should be an independent counsel charged with testing before the Commission the evidence of the merger being in the public interest. The counsel should, of course, have sufficient resources to call on expert evidence in order that he or she can carry out their task.

Behind this concern is a worrying weakness of the merger decision process. Those involved in a merger will provide evidence that the merger is in the public benefit. This evidence tends to be based upon optimistic assumptions which are rarely fulfilled after the event. There is no penalty if the assumptions are not met. It is very difficult for the Commerce Commission to judge the degree of optimism that is involved in the submissions. That is whey there is a need for a properly resourced independent counsel, whose function is to assist the Commission by putting the public benefit claims of the merger applicants under the most rigorous scrutiny.

In effect the public needs the public interest to be independently represented during the hearings. This in no way derogates from the commissioners themselves. They should value such independent scrutiny, as it will simplify their task of weighing the public benefit against the detriment from the increased market dominance. The merger applicants should welcome such an independent counsel too, if they are convinced that their case for the merger being in the public benefit is a valid one.

In the event of the determination by the Commerce Commission being that the merger should proceed, there remains one further key step in the merger approval. process.

By its holding of the Kiwi Share – which is different from its ownership interest in Air New Zealand – the Government has a duty to determine the public interest After the Commerce Commission decision, the government should then decide whether the merger should proceed, using the Kiwi Share as the legal mechanism by which it makes that decision.

While the determinations of the Commission and the evidence placed before it will be relevant, the Government may come to a decision which differs from the Commission. In my view it has the authority and judgement to come to a decision which differs from the Commission. In any case its assessment of what constitutes the public benefit – to what extent the merger would be in the national interest – may be different from the precise legal notions in the Commerce Act.

The practical import of this paper can be summarised as follows:

1. The government announcement next week, should be based on the narrowest basis of approval as a majority shareholder for the next stage of the merger to proceed.

2. The hearings of the Commerce Commission should include a properly resourced, independent counsel whose function is to test the public benefit argument before the Commission.

3. In the event of the Commerce Commission approving the merger, the Government should (using the evidence placed before and the determination of the Commission as well as other matters it considers relevant) make its own assessment of the magnitude of the public benefits and use the authority inherent in its Kiwi Share to agree or disagree to the merger.

Like the Government, Brian Easton is not in a position to assess at this stage whether the proposed merger has or has not substantial public benefits.

From Is This As Good As It Gets?

This entry was posted in Growth & Innovation on by .

Metro December 2002, p.84-93, by Gilbert Wong.

Keywords: Growth & Innovation;

An even greater challenge to the orthodoxy that the reforms were good for growth come’s from economist Brian Easton. The problem he identifies is the way the nature of the decline is perceived. While New Zealand is in 20th place 30 years after it was in sixth place, the OECD data does not show a slow and steady decline. Instead, says Easton, it shows stable growth marred by two massive drops that spike down like two steps on the graph of economic growth.

It helps to think of the OECD rankings as a race rather than a ladder. New Zealand may not be a slow runner Instead, Easton argues that the country had two major pauses for breath, which let other countries gain more ground. If New Zealand had not been taken out of the race for these two periods, the country would have grown at about the average rate of the OECD since the 1950s. We would have kept up the pace and our position in the top half of the club.

The nature of those spikes? The first big decline occurred from 1967. The prices for wool that at the time made up 40 per cent of exports fell by about 40 per cent, delivering a king hit to the economy for 10 years.

The second sudden decline occurred between 1986 and 1993. For seven years New Zealand lagged two per cent behind the OECD average growth rate. Easton blames the decline on the overvalued exchange rate that priced exports off world markets and, by implication, the way Douglas and Richardson ran the economy.

…………..

Economist Brian Easton is an optimist when it comes to growth potential. Although a member of the government-appointed Growth and Innovation Advisory Board, his comments here are his own. He points out that the three sectors targeted by government add up to less than five per cent of the economy. Even with spectacular gains, this would not necessarily translate to the giant boost the government seeks.

Easton proposes that the country concentrate on ways to make exports more profitable. Exports make up about 36 per cent of GDP, on the low side for an open economy. The easiest encouragement, he says, would be for government to lower our exchange rate. Exports would boom and investment would follow.

The trade-off would be inflation as imports rose in price. It would require public and political consensus. The good news for exporters, says Easton, is that New Zealand is such a small player that even if we doubled export returns in most areas, we would still not be seen as a competitive threat globally and could continue to trade happily without the risk of protectionist moves against us. Small can be beautiful.

Celebrating Educational Achievement

This entry was posted in Listener on by .

New Zealand Schooling is Already in the Top Half of the OECD

Listener 30 November, 2002

Keywords: Education;

Would you believe that on the available measures New Zealand is already in the top half of the OECD as far as education goes? Nothing in this column says it could not be improved. But by failing to celebrate success we downgrade the nation’s achievement, and leave ourselves open to some quack’s dangerous medicine.

The conclusion that we are doing well comes from an international study in which the 28 OECD countries looked at the skills and knowledge of 15-year-old students in three key areas of knowledge and skill: reading literacy; mathematical literacy, and scientific literacy. The study is called ‘Programme for international Student Assessment’ or PISA. There is a 142 page Ministry of Education Report PISA 2000: The New Zealand Context (and a 12 page ‘Overview’), so what is written here has to be condensed. But the key facts are that when 15 year olds were surveyed for their knowledge and skills New Zealand came 3rd in reading; 3rd in mathematics; and 6th in science.

There we are, right near the top – just ahead of Australia too.

Now before some readers claim the results are nonsense, let me confirm that international comparisons are always problematic – and contradictory. For instance, an international survey (using slightly different measures) of all adults in eleven countries found our literacy levels were middling.*

One source of scepticism is that critics have absolute standards of what they expect our students to attain. PISA provides a relative measure. It says that while average New Zealand students may not attain some ideal absolute standard, the students in most other countries do even worse. If you despair about the attainment of our students, you would despair even more if you lived just about anywhere else.

Other educational indicators reinforces the impression that our core education system is internationally competitive. Tables in the OECD Education at a Glance usually have New Zealand above the OECD average. Among the exceptions are that on some measures, our teachers are slightly more overworked and underpaid than the OECD average (on others it is the reverse), and our primary and secondary school class sizes are about 10 percent above the average.

On the basis of all these measures, an examiner might grade overall New Zealand primary and secondary education with a high B, and an occasional A for some, but add a stern ‘could do better’. (There is little reported on pre-schooling, the area where New Zealand educationalists take the most pride.)

The place where we really need to do better is among the Maori and Pasifika population (and some Asians). We seem to have one of the bigger bottom tails among the OECD. To put it positively, the Pakeha reading and mathematical achievements are higher than for any single country, and they are behind only two on scientific literacy. To put it negatively, the Maori Boys and Pacific Islanders are below the OECD average. (Maori girls are just above the OECD average.) The government is committed to improving their position. Note there are more Pakeha down there with the Polynesians, so if we are to succeed it cannot be an exclusively Brown strategy.

We should celebrate the educational achievement. It is the result of the nation prioritising core education, a commitments which goes back at least sixty years to Peter Fraser and Clarence Beeby. Their inspiring vision was reinforced by both the subsequent educational leadership and the work of our teachers. Sure, some are duds, but most are not – on international standards anyway. Of course the extraordinary achievement is not good enough, but it is important that we dont grab at quack educational theories which damage our successes (as we did in the 1980s with economic policy). One clue to the charlatanism is it will ignores the successes of our schools.

However, there is a puzzle for an economist. While we seem to have one of the best core education systems in the world, that economy is much lower ranking. In part it is that while a well educated workforce may be a necessary condition for high economic performance, it is by itself not sufficient. Other things are necessary too. More hopefully one might argue the strength of our education system means we have the potential to grow faster.

However my inclination is that while our pre-, primary, and secondary education system are reasonably sound (on international measures), we have a weaker post-secondary system, the issue I turn to in my next column.

Footnotes

1. As published the column added
“Perhaps our schools were not as good when they taught the bulk of us as they are now, perhaps our adults lose the skills more than most because of our failures in the tertiary sector (the subject of the next two columns).”
Warwick Elley kindly wrote to me pointing out that
“The problem was the response rates [of the Adult Literacy Surveys by country] were wildly different. NZ and Australia had relatively good response rates – most other countries had less than 70%- some as low as 36%. The international comparisons were therefore meaningless. There were several other problems with the tasks and cut-off points.”
Mea culpa. Apologies to my readers and my gratitude to Warwick.

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2. A UNICEF report published after the column ranked New Zealand 10th most effective education system in the OECD.