Who’s Hugh

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

Review of BATTLE OF THE TITANS: Sir Ronald Trotter, Hugh Fletcher and the Rise and Fall of Fletcher Challenge Bruce Wallace (Penguin $34.95)

Listener 17 November 2001.

Keywords Business & Finance; Political Economy & History

In 1908, James Fletcher, a 22 year old Scot arrived in New Zealand with ‘a few pounds in his pocket’ and carpenter skills which he used to found a building company which expanded into Fletcher Holdings. By 1955, his son, also James, persuaded father and the New Zealand government that not only should Fletchers build the huge pulp and paper factory at Kawerau, but it should own part of it. In 1981, Hugh Fletcher, the son of the son, amalgamated Fletcher Holdings, Tasman Pulp and Paper, and the sprawling Challenge Corporation to form Fletcher Challenge, the biggest New Zealand business amounting at the time to almost a tenth of the capitalisation of the New Zealand share market.

By 2001 the company had been downsized, split into separate businesses and sold off. It is the roller coaster of this last twenty years that journalist Bruce Wallis, who once worked for Fletcher Challenge, describes. But the history of Fletchers before 1981 looms large. (Readers may catch up on it in the biographies of the first two Fletchers, Bruce Jesson’s writings including The Fletcher Challenge, and a chapter in my just published The Nationbuilders.) The grandson tried to repeat the earlier Fletcher successes but the economy which they had built had changed dramatically.

There was another dynasty involved in the merger. Hugh Fletcher was the first managing director, but the Chairman of the Board was the previous chief executive of Challenge, Ron Trotter. His father Clem had been managing director of the Farmers Cooperative Organisation, and his son, Bill, heads the New Zealand branch of C.S. First Boston (which advised Fletcher Challenge). .

Wallace tells a gripping story of the rise and fall of the business and of the interaction of the two business leaders, based on documents and interviews of senior staff. It is the sort of story which balances the anodyne accounts served up in most business pages. The business giants portrayed there appear in this book, humans prone to losing their tempers, getting things wrong, and doing some damned stupid things. It may not have been Wallace’s intention but the book reads as a ‘get Hugh Fletcher’ exercise. He is portrayed as intellectually superior to any of the others in the firm, energetic, visionary and extremely persuasive, but almost all the mistaken decisions the company made are attributed to him. Perhaps the senior executives in their recalling tended to pass the blame up. One is left wondering what exactly they did, and how they justified their high remuneration. We await the Fletcher reply. It may argue that the decisions were much more collective.

Because the book is written from a company perspective, it fails to relate the business to the economy-wide context. Much of Fletcher Challenge’s difficulties arose from the stagnation and poor savings record of the New Zealand economy, which meant its home base was weak, and its ability to raise local funds limited. The founder companies had grown up in the regulated pre-1984 environment, and each had, for instance, a finance company to assist them with funding in the tightly controlled monetary environment. The world in which Fletcher Challenge was conceived was very different from that in which it died. Perhaps like the moa it failed to adapt?

Certainly Fletcher Challenge benefited from the privatisation program picking up good quality cheap government assets in the 1980s (although there is a great story of how Jim Bolger and Bill Birch squeezed the last cents out of them in a forestry sale in the 1990s). But ultimately New Zealand’s poor economic performance after 1984 undermined the company. The point is not Hugh Fletcher (or whomever) made mistakes (although some were extremely costly). Some of its investment decisions of any enterprising company will fail. What dragged Fletcher Challenge down was its lack of successes. There were too few in stagnant New Zealand. .

The book’s title comes from the chapter which describes the boardroom battle in the mid-1990s, when relations between Trotter and Fletcher had thoroughly broken down. In the early years they had, in the marriage guidance terminology, worked hard to make the relationship work, all the more astonishing given Trotter’s preference for rogernomics, while Fletcher was thoroughly seeped in the tradition of nationbuilding. But eventually the company’s poor performance drove them into a rivalry, as rivetting as a good political novel. However in Greek mythology, the Battle of the Titans was about the old gods against the new ones, the Olympians. Certainly the falling out between the ancient Titans contributed to their demise, but the times were achanging and the old ways were overwhelmed. This does not mean we should think of Trotter’s and Fletcher’s successors the olympian figures currently portrayed in the business pages. Time (Chronos, the father of the Titans) will prove them as charming, heroic, energetic and as flawed as did those who preceded them. The new deities are the forces of the globalised market, which on the evidence of this book, brook no challenge and ultimately grind all exceeding small.

A Hubris Of Managers: when Corporate Takeovers Go Bad

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

Listener 17 November, 2001.

Keywords Business & Finance; Governance

Why should New Zealanders be abused when a Singapore owned company closes down its Australian operations? That is what happened when Air New Zealand shut down Ansette Australia. Yet, when the New Zealand government privatized the company in 1989, nobody mentioned that there would still be such ongoing attachments. They were certainly ignored in the 1984 Treasury paper setting out the case for privatization of all government trading activities. That paper had a very narrow focus, justifying private ownership using a theory without empirical content and ignoring the practicalities of the real world. Like that Ansette workers disregarded that it was a mainly Singapore owned airline dumping them, and picketed the New Zealand prime minister.

The theory’s idealization that a good company would run each state owned enterprise better than the government leapt over some rather obvious difficulties. The hubris theory of company takeovers (I first saw it published in 1982), suggests there is a tendency for acquisitor-companies to pay too much. Company managers are over-optimistic about their ability to add value to a new company. The takeover increases their company’s debt. Instead of being concerned about managing the taken-over company well, the acquisitors concentrate on extracting as much cash as possible to service the debt. Profits are not reinvested, but paid out as dividends to the shareholder company. (“Herald” business columnist, Brian Gaynor argues that New Zealand companies have a bad record of paying too high a proportion of profits in dividends.) Investment, research and development, marketing, human resources development crucial for its long term survival are cut back. Takeovers, rather than succeeding, are more often failures.

(Other means by which a significant shareholder can extract cash from a partly owned company include selling it an overpriced assets, extracting an excessive management fee, and overcharging for services (say insurance) by an associate, all of which damage the company and its small shareholders.)

In the Air New Zealand case, one of its major Singaporean shareholders, Brierleys, owns a substantial portion of the British Thistle Hotels chain, which it acquired in extremely unsatisfactory circumstances (the hubris theory again), and which has been a financial albatross. To service its debt, Brierleys has been pressing the other companies it owns (or partially owns, but has a representative on the board of directors) for dividends. The Air New Zealand disaster may be one consequence.

Directors – especially those who think they do not need to know anything about the businesses of the boards they sit on – also illustrate the hubris theory. One of the Air New Zealand directors excused the board’s ineptitude saying they could only operate as well as the advice they were given. Given the fees they were paid (the 13 directors received $900,000 a year between them) one might hope for some competence in their selection of advisers.

But why participate in takeovers, if about three out of four are going to be a disaster? There are few rewards for the director who counsels common sense – director’s fees generally go up after an acquisition. (Do they come down when the ruin occurs?) There are even fewer rewards for cautious advisers. Their fee for a deal is often around 1.5 percent of the cost. (That would be in excess of $1.3m on the Air New Zealand bailout, although Treasury probably screwed it down a bit.) So takeovers generate positive incentives for directors and those who make the deals, even if small shareholders suffer. Recall Business Roundtable ex-chairman, Douglas Myers, who said a lot of ‘old farts’ lost money on the share market. Above is a list of some of the ways they have.

One might argue that shareholders – old farts and others – are there by choice. But there are others with less choice who also depend upon the company who also suffer: customers, workers, suppliers. Sometimes the entire economy can – hence the need to re-nationalise Air New Zealand. The 1984 Treasury report said good quality ‘cornerstone’ shareholders can result in good company performance. But not all such shareholders are good quality.

In the 17 years the extremist theory of privatisation has been tested. There is a good study by Alan Bollard and Ian Duncan that corporatisation of state owned enterprises led to better business efficiency (but this must in part be that they were told to pursue only that efficiency and no other – social – objectives). However, compelling evidence on inevitably superior performance by privatised companies does not exist. That which existed by the 1980s was equivocal, and the new research remains so, with examples of successes and failure, quite unlike the prediction of the theory-based fact-ignoring 1984 paper.

This does not necessarily mean that enterprises should be re-nationalised in order to keep the businesses out of the hands of incompetent directors and cornerstone shareholders. Some of the criticisms against government ownership remain valid. But now the argument is one of pragmatic judgement of the relative merits of public and private ownership, not of extremist rhetoric. Meanwhile small shareholders need to avoid being gulled into believing in naturally superior company directors acting in their and their company’s interests.

Bruce Jesson: 1944-1999

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History on by .

This is the envoy of The Nationbuilders. The book is now out of print and the chapter is published with permission. Other items on Bruce on the website are as follows:
His Purpose is Clear: Reflecting a Life of Thought and Experience (February 1999)
Global Warning: What would have Bruce Jesson have said about APEC (September 1999)
Nationbuilding and the Textured Society (Bruce Jesson Memorial Lecture, October 2001)

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

It would be wrong to end this book with the post-1984 colonials. But it is not easy to write about the new millennium nationbuilders for they are still alive and active. Some will try to revert to earlier versions of nationbuilding, with little recognition of the changes which have occurred which make its policies, if not its objectives, obsolete. The significant ones will be those who pursue the aspirations of their nationbuilding predecessors, but recognize the changing economic and social environment. It is for them to tell us about what they mean by their nationbuilding, although they are likely to do so – if their predecessors are any guide – by their actions rather than their words.

Alas their number will not include Bruce Jesson, who despite being a generation younger than the post-war nationbuilders, died in 1999 too early to contribute directly to the new millennium. Jesson grew up in a working-class family in, as he saw it, colonial class-riddled Christchurch.

The English consciousness that pervades New Zealand was a false consciousness. We were colonials not the real thing. The Christchurch, where I grew up, cultivated an English character. The Christchurch middle classes sent their children to private schools and elite state schools which were even more English in their tone than their curriculum. Jerusalem was sung in school assemblies. Girls' schools played hockey, boys' schools rugby. The school structure was hierarchical and authoritarian with a system of prefects and at some private schools even fags. Not surprisingly, the Christchurch middle-classes were exceedingly English in manners, tastes, accents and sense of humour.

Yet this culture was transplanted, not authentic. There was nothing English about the large, dry, flat paddocks spreading across the plains, nor about the braided rivers sweeping down from the mountains, nor about the casual No 8 wire culture of Canterbury farmers and workers. Nor was there anything particularly English about suburban Christchurch with its bungalows and large sections. Even the Christchurch elite, living in ornate two-story houses in Fendalton, showed some signs of New Zealandness in their relatively casual attitudes and lack of pomposity.[1]

In some respects, I think, Jesson is wrong. Like Glover in the 1930s he assumes that what the burghers of Christchurch thought was Englishness, was in fact what was really English. Jesson’s dislike for ‘Jerusalem’ was because he thought the singers were excessively Anglophilic. Yet he would have agreed with William Blake’s general sentiment. The (untitled) poem, from a longer work Milton, is preceded with Blake’s rejection of ‘Greek [and] Roman Models if we are true to our own Imaginations,’ in favour of a local one – precisely Jesson’s concern to create an authentic indigenous culture. No doubt some at his school believed they were singing about ‘England’, while Herbert Parry’s score has an Elgarian pomp and circumstance which Blake may not have approved. But some in the assembly were singing about their ambitions for New Zealand, like Peter Fraser, building Jerusalem in ‘this our fair and pleasant land.’ For them, England was as much a geographical reality, as Jerusalem was for Blake. The universal message of the poem is captured in an American anthology of English language poems which concludes

Blake’s words are very likely the most inspiring ever written by an Englishman for Englishmen. A grand tradition of rugged struggle in politics and religion extends from John Milton and John Bunyan in the seventeenth century, through Blake and Wordsworth in the eighteenth and nineteenth, down to our own time in writers as diverse as W.B. Yeats and Joyce Carey.[2]

Yeats and Carey were Irish.

Even so, there is a truth in Jesson’s observation of a colonial cringe which pervaded much of the society in which he grew up. But if Christchurch was (and is) a bourgeois town, that generates a social solidity and coherence, which gave, I think, the sense of the sort of society which he sought for New Zealand as a whole. You can see Christchurch in two ways. Jesson’s family moved into a state house when he was eight years old, in Ilam half a kilometre from Fendalton’s elite Glandovey Road. Either the social clines in Christchurch are steep, or rich and poor in Christchurch snuggle together, pretending to be different but dependent upon one another. Probably both. Jesson went to the local state school, the elite Christchurch Boys’ High School, where boys from the upper middle class mixed with selected high ability boys from the working class.

He first came into public prominence with the ‘flag burning’ incident, in which a Union Jack was burnt in front of the Governor-General visiting Canterbury University. At that time we all claimed to be ‘republicans’, although the most notable expression was remaining seated for the playing of the British national anthem, God Save the Queen, at the beginning of a cinema show. (It was advisable to check the seat behind was empty, to avoid a sharp jab in the kidneys from an irate member of the Returned Servicemen’s Association.) Jesson lifted the game when he asked why we should get upset by the burning of the flag of a foreign nation, forcing us to question what was New Zealand’s relationship with Britain. His Republican Movement was launched. As he wrote:

The republican arguments that were developed in the 1960s reflected the left-wing nature of protest politics at the time. New Zealand, because of its overwhelming dependence on Britain, was seen to be in an analogous situation to the colonies that Britain had in the not-too-distant past ruled directly. ‘Neo-colonialism’ was a term then in vogue and New Zealand was seen as in this predicament. And independence movement was needed, with republicanism being seen in this light.

Although republicanism focussed on the symbolic dimension, the underlying analysis was economic, with the economic arguments being borrowed from Dr W.B. Sutch. …

Although some republicans were sceptical of Sutch’s goal of an insulated economy and criticised what were seen as contradictory elements in his thought, they shared his desire for an independent New Zealand. Sutch’s arguments set the framework for public discussion about New Zealand independence. Although Sutch was not personally interested in the issue of republicanism, he provided the economic basis for the republican arguments.

Republicanism also reflected the cultural nationalism that was prevalent at the time. … Britain was the source of our culture, the place educated New Zealanders related to and sometimes migrated back to. This caused a deeply-felt conflict; it meant a denial of our own identity. And the obvious response – beginning in the 1930s – was to develop a source of culture within New Zealand.[3]

To the several of threads in republicanism which Jesson identifies – symbolic, economic, and cultural should be added the notion that all men and women are equal, which underpins each of them.

Jesson saw the economic dimension as salient. Yes, he was a Marxist a sophisticated and subtle one. (The shortest definition of Marxism is ‘it’s the economy, stupid’.) One might have thought he was born one, given his family background, but until the age of fourteen Jesson was an active Baptist. Then he read Charles Darwin’s The Origins of Species, and became a Marxist, but

I was at odds with the rest of the Left because I never believed in the Marxist revolution. I never had any faith in a messianic communist movement and had no sense of dogmatic certainty. I felt no sympathy with Russia and after the Cultural Revolution in China I turned right off. But Marxism did provide a philosophical, analytical way of looking at the world. It was a model which teased out logical complexities. I believed that the radical movement had to have New Zealand origins as a defining thing. I had the nationalistic view that overseas stuff was frippery. I also saw the New Zealand left as moralistic, and hopeless on economics their eyes glaze over.[4]

The penultimate sentence is probably not fair to Jesson, even in the 1960s. It is true he had little overseas experience no more than the odd trip abroad in later life. But he was a keen reader, travelling via books. He came upon Georges Hegel, who inspired Karl Marx, although most Marxists have not given his attention to the inspiration. He thought ‘Hegel was in fact a much better philosopher than Marx,’ revelling in his logical purity.[5] Perhaps it was no accident that his hero was a Continental. He was saying ‘look outside the Anglo-American canon – not all the wisdom of the world was initially written in English, nor all the relevant experience of the world occurred in only one or two countries. Look most at New Zealand’.

Jesson completed his law degree at Canterbury University. (Why law? His great love was history, which he read even in his last days. Perhaps the working-class boy thought it was safer to get a ‘proper’ job.) In 1967 he moved to Auckland, spending a few months in a law firm before the partners discovered his republicanism.

More than Christchurch, Auckland is a hollow society, if only because its population growth makes it difficult to consolidate its social institutions. (Wellington is the most hollow of the three, for the government pervades almost every Wellington social institution.) Auckland lacks the solidity that gives social coherence. Rather, as the joke puts it, it is 34 villages connected by a sewer pipe, a multitude of communities with a common environment and infrastructure. If Christchurch’s class structure is based on status, Auckland’s is based on money (and Wellington’s on politics). Bobby Dylan says that ‘money does not talk, it swears’, but it also gives a forward looking vibrancy. Auckland is not only the most significant New Zealand centre of economic growth, but as the most Pacific of New Zealand cities is alive with Island and Asian migrants, and Maori.

Perhaps Jesson hoped that one day Auckland would couple its vibrancy with the social solidarity of Christchurch. He spent the second half of his life there, marrying Jocelyn. At first he did a number of jobs such as working in the freezing works at Pokeno, in South Auckland, but when their two daughters came along in the 1970s, Joce continued teaching, and Jesson became a househusband, at a time when the concept hardly existed. The child- and house-care were combined with active independent scholarship, at a time when that concept hardly existed in New Zealand either. He read widely, and spent an enormous amount of time in the Companies Office. (He was irate when the government began charging a search fee, for it meant he could no longer afford to investigate particular companies.) From 1974 to 1995 he produced the monthly The Republican, ostensibly to promote republicanism, but it was also a vehicle for Jesson’s ideas, where he learned the craft of journalism, and it became the centre of a network of people, who eagerly read his articles for their quality and insight. (The many hours he spent talking in pubs added to a particularly simple direct presentation, although its casual simplicity was a consequence of considerable thought.)

In the late 1970s, the family moved into Auckland, living first at Otahuhu, later at Mangere Bridge looking across the Manakau Harbour. (He loved fishing.) He went public in 1981, when Warwick Roger asked him to write a political column for Metro, the monthly journal which captured the vibrancy of the upper income end of Auckland so well. (Roger would have had little truck with Jesson’s politics but the, arguably, best editor of the 1980s could identify quality.) The independent scholar had a platform.

There are not a lot of independent scholars in New Zealand, if we exclude those who have retired on a pension. Their scarcity is an example of the hollow society, the lack of social institutions which are reasonably independent of government. (There is a parallel, and larger, group in the arts world.) Jesson’s first loyalty was to the intellectual work he produced, even if he modestly described himself as a ‘journalist’. Independent scholars are not well paid. As is often the case in the world of arts, the spouse has to be very supportive. The size of the country limits the market of those willing to pay to support the independent scholar, say, through royalties. (In a larger country, a collection of Jesson’s writings would already be published as a book.)

One might have thought the universities would have promoted independent scholarship. Jesson did spend a period as an (unpaid) visiting scholar at the Department of Political Studies at the University of Auckland. They gave him a room, access to the university library, and colleagues. (He learned he was as intellectually as good as a tenured academic, better than most.) Such opportunities were rare.

In the 1970s his interest in the cinema had led him to investigate the Kerridge-Odeon Corporation. He went on to Fletcher Challenge Ltd, and wrote the self-published The Fletcher Challenge, which led to the successful 1987 Penguin Special, Behind the Mirror Glass: The Growth of Wealth and Power in New Zealand in the Eighties. This was followed in 1989 Fragments of Labour: The Story Behind the Labour Government. Today’s readers may miss one of the achievements of that book. It was published in the same week the Richard Prebble was sacked from the Labour cabinet. Thus the foresight in Jesson’s analytic framework now appears with hindsight, just as he presaged the 1987 financial sector collapse in the earlier book.

It is not only the quantity of his writings which are impressive, but the quality. Jesson introduces analytic concepts for which future academics who develop them will receive doctorates and chairs. He proposed the ‘historic compromise’ of Chapter 5. The ‘hollow society’ has been used throughout this book. These two fundamental notions are worthy of placing Jesson in any pantheon of thinkers about New Zealand.

If Jesson loathed the colonial cringe, he detested cant, including the political correctness in the left. An earlier quotation portrayed his wrath over the failure of the left to think systematically about the economy. A little earlier in the interview he had condemned various communist sects as ‘authoritarian in structure, apologists for mass murderers, and no feeling for the New Zealand situation.'[6]

The abandonment of the historic compromise by the Fourth Labour Government after 1984 gave Jesson much pain. There was passion just beneath his steel-cool analysis. He joined the NewLabour Party, which was formed when Jim Anderton abandoned the Labour Party (or the other way around). Joce reports that he saw it as ‘the hope that a real democratic alternative could form for our country. Even then our children warned, “it will all end in tears”.'[7] Jesson found considerable conflict between his role as an intellectual and independent commentator on one hand, and membership of a party on the other.

He won a place of the Auckland Regional Council (ARC), as a NewLabour candidate. In the next elections, he ended up chairing the Auckland Regional Services Trust (ARST) which the government had established to hold a number of public enterprises and assets, previously owned by local authorities. Jesson had a room in the Trust office, but as chairman he was the lowest paid of the staff. It was the one time in his life he received a reasonable remuneration for his contribution to New Zealand. His constituents were well rewarded. His party ticket had been elected on a platform of maintaining public ownership, whereas the legislation which governed the Trust required privatisation. Jesson delayed, arguing there was a conflict in the law. His letter to the minister hit the too-hard basket. So ARST did not privatise while Jesson was in charge. Aucklanders benefited. For instance ARST’s politicians had been told the Yellow Bus Company could be sold for $35m. Hanging on to it, over the following six years ARST received in dividends about the same as the expected capital sum. It was sold in 1999 for $111.6m. The ARST was expected to pay off all its debts over a fifteen-year period. It paid them off in three. The value of the assets will be used to fund Auckland’s infrastructure. They should name the second harbour bridge after Jesson.

This politicking meant Jesson did not have time in the early 1990s to write his next book. He did not seek re-election in 1995, planning to write a ‘kind of travelogue’ about Auckland, of how business had changed the city he loved. Almost simultaneously, he learned of the cancer which was to kill him, and turned to writing his last book about the political economy of the 1990s. It took a while to start it, and there was always the hope the cancer would be cured. (The waiting time for his radiography treatment was far in excess of recommended clinical standards. Jesson may be another victim of the health reforms.)

Only Their Purpose is Mad, published months before his death, is both an important book about New Zealand, and a unique account of how the financial community worked, drawing on Jesson’s ARC and ARST experience. The advice he was given was misdirected because as he reports in the case of the Auckland Ports Company, ‘not only was most of the argument political in nature, but there was also no analysis of the commercial advantages and disadvantages to the ARC of a sale.’ It proved grossly wrong. ‘None of the ARC’s highly paid [$2000 a day plus expenses] advisers told us it would be the height of commercial folly to sell the Port Company for $200m.'[8] His detailed account in the book of the collapse of the private corporation, Maine Investments, reminds us not only of another massive failure in financial advice (with no penalties on the faulty advisers), but Jesson’s willingness to do the footslogging involved in commercial analysis – for no reward (certainly not $2000 a day) other than the satisfaction of getting something right.

Encapsulated in the book’s title is its theme that the financial sector is extremely capable but, like Captain Ahab chasing Moby Dick, its purpose is mad. Ironically, although Jesson was too modest to say this, his chairing of the ARST demonstrated that when financial advisers were given a social purpose, as occurred at the ARST under him, their financial skills could contribute to a socially effective outcome.

Jesson saw Only Their Purpose as an analytic book about the past, and he wanted to write one about the future. His strategy was to write a series of articles for Political Review, to be reconstructed into a book later. Alas only one article appeared in the month of his death, and that is reflective rather than forward looking. It argues that globalisation is a material force of history like industrialisation was in the nineteenth century (although Jesson would have put this less crudely). The freezing worker’s son said he would prefer to demonstrate with farmers against US farm protectionism, than with the general public and its vague sentiments against globalisation. He was not driven by a nostalgia for a past, unattainable today, and which probably never existed. He saw the issue as how to respond to the opportunity, to enable globalisation to lead to a better New Zealand. That last essay began to explore how to build a New Zealand nation that could benefit from the opportunities that globalisation creates.

The first step would be to develop a nationalism, without being isolationist. I do not think he would have insisted one had to be a Marxist to do this, even if his Marxism gave him some distinctive insights. But it would involve an understanding of economic theory and developments. At the foundations of any nationalism he would have had economic republicanism, based on a commitment to his country.

Jesson had a delightful sense of humour. He asked that the Bohemian Rhapsody, by Queen, be played at his funeral the republican wanted royalty at his funeral, didn’t he? Its opening word probably express his view of living – and of himself:

Is this the real life
Is this just fantasy
Caught in a landside
No escape from reality
Open your eyes
Look up to the skies and see
I’m just a poor boy, I need no sympathy
Because I’m easy come easy go,
A little high, a little low,
Anyway the wind blows, doesn’t really matter to me.

Jesson was a man of the people, not in a charismatic sense, but he loved to spend time with ordinary New Zealanders. (He was buried with his billiard cue from the Otahuhu Working Men’s Club.) He never forgot his soil, nor those from whom he came and the gift they had given him enabling him to spend what he thought a marvellous life. While we may regret that his life was cut off in his fifties, this child of the New Zealand welfare state saw it differently. Shortly before his death he told a reporter:

If you had said to me, when I was 17 or 18, ‘you’ll spend your life writing, you won’t make any money, you’ll publish magazines, you’ll publish books,’ I’d have thought: ‘Wonderful. What better a way to spend your life?’[9]

He may not have approved Bernard Shaw’s definition of socialism as doing what one could do well. Yet he practised it, for he was good at being a New Zealand intellectual, by no means an easy task, and all the harder without a sinecure. He wrote in his last essay

You can see my problem as a New Zealand nationalist. How do you develop a sense of identity among people who lack any originality or confidence in themselves? Do not get me wrong. I am not saying that we are entirely a nation of mediocre and timid conformists. I have known plenty of New Zealanders who have been well-read, intellectually-stimulating, non-conformist, courageous and sometimes eccentric. They have tended to be marginalised, however. There is something about the structure and culture of this country that fosters the mediocre conformist.[10]

(Do we hear Keynes murmuring ‘worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally’?)

Alas, Jesson did not have time to go on to answer how do to develop this sense of national identity. Except he has done so – as did the other nationbuilders – by the example of his life, committed to building a Jerusalem in this our green and pleasant land.

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Sources
Easton, B.H. (1999) ‘His Purpose is Clear’, Listener, Feb 13, 1999, p.56.
Jesson, B. (1985chx) The Fletcher Challenge , Auckland.
Jesson, B. (1987) Behind the Mirror Glass , Auckland.
Jesson, B. (1989) Fragments of Labour: The Story Behind the Labour Government , Auckland.
Jesson, B. (1996) ‘Republicanism in New Zealand’ in L. Trainor (ed) Republicanism in New Zealand , Palmerston North, p.47-59.
Jesson, B. (1997) ‘Foreword: The Role of the Intellectual is to Defend the Intellectual’, in M. Peters (ed) Cultural Politics and the University in Aotearoa/New Zealand , Palmerston North, p.9-14.
Jesson, B. (1999a) Only Their Purpose is Mad , Palmerston North.
Jesson, B. (1999b) ‘To Build a Nation’, New Zealand Political Review , April 1999, p.24-33.
Jesson, B., A. Ryan, & P. Spoonley (1988) Revival of the Right , Auckland.

There is no biography but I have a file of obituary and related material more than a centimetre thick, copies of which will be deposited in the files of the Dictionary of New Zealand Biography .

Endnotes
1. W. Harmon (ed) (1990) The Classic Hundred: All-time Favorite Poems , New York, p.105
2. Jesson (1999b) p.30.
3. Jesson (1996) p. 50-51. (I am not sure Sutch was quite as ‘insulationist’ as Jesson portrays here, given his commitment to export diversification. )
4. Quoted in C. Guy, ‘The Republican’, Listener , May 1, 1999, p.27.
5. Jesson (1997) p.13.
6. Reported in C. Guy (1999).
7. Letter in Watchdog , 92, December 1999, p.35
8. Jesson (1999a) p.170.
9. Interview by Michele Hewitson, Weekend Herald , April 3-4, p.J2.
10. Jesson (1999b) p.30-31.

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Corporate Crossfire: the Insecurity Of Creditors when Companies Collapse

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

Listener 3 November, 2001.

Keywords Business Economics & Finance

Every business has a legal and a physical side: a legal entity with financial assets and liabilities (including bonds – fixed interest loans) and a production activity with physical assets and employees. Usually they work in harmony. …

… Sometimes they become disjointed. There was nothing wrong with Air New Zealand’s production activities (other than the possibility of a world tourism recession), but its financial side was in trouble – too much debt relative to the owner’s equity – so the New Zealand taxpayer will inject $885m of capital which will be used to pay off debt.

Sometimes the two sides get in conflict. Catherine Handley’s Receiving Orders: Caught in the Corporate Crossfire provides an insightful account of what can then happen. (Everyone I know says to skip the first twenty pages and the last forty. The book’s philosophizing is not as rivetting as its narrative.) By way of background (my source is Bruce Jesson’s Only Their Purpose is Mad – he would have loved Catherine’s book), as a result of various financial manouevrings, Brierley’s Skellerup Group of companies was sold to Maine Investments in 1996. The deal involved a leveraged buyout, where most of the sale price was financed by ‘junk bonds’, which give high yield returns, but offer no security other than the future trading income. (Why would any sensible investor buy junk bonds?) The price paid was too high. When interest rates rose and the cash flow slowed, the bond holders got agitated. Eventually they put some of the companies that Maine owned into receivership. The best known were Levenes and Palmers Gardenworld.

Handley was the chief executive of Palmers, and had been horrified by the treatment of Levenes. The chain of home tradesmen’s (and women’s) suppliers was making a financial loss. It was closed down with the valuable bits sold off, without concern for its staff, suppliers or customers. She had recently turned Palmers around, and thought its cash flow made it safe from a similar treatment. However the bond holders were so nervous they dumped on Palmers too, although this time they wanted to sell it as a going concern. Handley describes the open warfare between the company’s staff and the receivers from Melbourne. It is a great read, displaying the determination and humour of the resistance from the production side, against often thoughtless and arrogant behaviour on the financial side.

As there will be more New Zealand firms going into receivership or liquidation, it is worth going through some of the financial issues. The liabilities of a business are ranked from the most secure to the least secure, which is the equity owed to its shareholders. Under a leveraged buyout, there is little equity, so that if anything goes wrong – say a business downturn with a reduction of cash flow – the bond holders are more exposed to losing their investments than if there had been a lower debt to equity ratio. If the bond holders get too agitated, they can put the company into receivership as means of recovering all or part of their investment. In the case of Palmers a consequences was unsecured creditors made losses too.

Unsecured creditor only get (whole or part) of their money back after the secured bond holders are paid off. Among the unsecured creditors are ordinary New Zealanders just like you, dear reader. They might be workers owed holiday leave in excess of two weeks, or redundancy payments. (Remember Qantas New Zealand?) They might be suppliers yet to be paid. (Like the nurseries which supplied Palmers, or subcontractors when a big construction company goes bust.) They might be purchasers who have paid but not yet received all their goods and services. (All the pre-purchased tickets and airpoints could have become valueless had Air New Zealand had gone into liquidation. The consumer guarantees on what you have bought may become worthless.) You can see this in the Palmers story. Protecting the investments of the secured creditors, meant that the unsecured creditors suffered.

You may think this is unjust, or just the inevitable consequence of the market economy. It is certainly dependent upon the provisions in the law. For instance, the law gives greater protection to the first two weeks of holidays owed to workers, to money used for goods on layby, for livestock at freezing works (following the Fortex fiasco) and of course the taxman ranks at the top.

There has to be some ranking of creditor security. Whether we have the right order I do not know. Is it time to have a review? And while everyone wants to have their investments ranked above the bondholders’, exposing bonds to greater risk may mean that there will be a shortage of quality finance to good businesses, or their debt servicing will become more onerous. Dont forget that any money you may have in a bank, even in your cheque account, may be indirectly invested in the bonds by your bank. If your bank loses too much money, you may lose your investment (as happened in the case of the DFC). Perhaps consumer, union, and trade magazines should explain unsecured creditorship to their readers. In the interim read “Receiving Orders”.

Building a Nation

This entry was posted in Listener, Political Economy & History on by .

Listener October 20, 2001

Keywords: Political Economy & History

That great New Zealand nationalist historian, Keith Sinclair called it the ‘LBW syndrome’. In his day it was ‘Leading-the-Bloody-World’, the attitude that New Zealanders claimed to be the best at everything that mattered. …

… Of course there are some things that we are good at, but often LBW involved judicious selection – rugby but not soccer – or manipulation of the data – our low infant mortality rate omitted the Maori – or even misrepresentation of the actual situation. Today it is still LBW but now we insist that we are lagging, while we carry out the same manipulations. The truth is that in most rankings, we are somewhere in the middle, as one might expect. Sometimes we are a little better than average, sometimes a little worse, occasionally near the top, occasionally near the bottom.

The lagging obsession came out of the leading one. If everyone believed that New Zealand was or should be top of everything, and one wanted some change in policy, then the rhetoric got public traction by arguing that we were lagging. So everyone who wanted a policy change (that is everyone) began to do it, and since typically we were in the middle of any international ranking, it was easy to prove if we ignored every country below us. Before long the uncritical Leading-B-W became an uncritical Lagging-B-W. The nation is now in a trough of despondency because we seem to be doing badly – and the occasional international success simply reminds us that we are doing badly every-bloody-where-else.

So we have lost confidence in being a New Zealander, of our being able to achieve results better than we might reasonably expect given our size, that we – in the jargon – cannot punch above our weight. All we can do, so the insecure argument goes, is adopt the colonial cringe – that our salvation is to imitate some other nation – once it was England, now it is American or Australia – or even to join them.

As someone who grew up in the 1960s I find this defeatism uncomfortable. I was inspired by Bill Sutch’s question of whether we wanted to be a colony of nation – the question posed in a way which gave no doubt what he thought was the answer. Those wonderful – often impromptu – speeches of Norman Kirk articulated the same ambition

Let us have a sense of pride in being New Zealanders. Let us recognise the value of the unique way of life we have built here – a humane, non-violent society, free from the social and economic injustices that plague so many societies. Let us proudly cultivate a sense of nationhood and stand up for ourselves in international political and trade circles, not acting in a spirit of independence merely for the sake of asserting ourselves, but to protect our own interests, both political and commercial.

Then you were proud to be a New Zealander, and determined to make it a better New Zealand.

These men did not suffer from the arrogance of the leading-b-w syndrome. Sutch drew lessons from Denmark, Israel, and Sweden. (Today he would add Ireland.) Kirk was passionately interested in the world. There’s was an engagement: learning from others, trying to do better, knowing sometimes – but not always – you even did best.

Yet when my generation took over government in 1984, they abandoned nationbuilding. (Not all of us, I haste to add, just those in power.) No longer was the vision of sturdy independence, but of obsequious and uncritical imitation. Astonishingly, the infatuation was always with the United States of America. Now I have the greatest admiration for many aspects of the US – as did the nationbuilders. But the Treasury paper that depended solely on US economists to provide guidance on the management of publicly owned enterprises was simply absurd. It would be like going to Eskimos for advice on the cultivation of bananas. The sycophantic pattern continues. A recent Business Roundtable publication on ‘equity’ looked only at the US experience, without hardly any reference to the Anglo-European discussion which is far more relevant (and even less reference to the Australasian discussion). Not only was their thinking colonial, but the policies the rogernomes pursued were colonial too – whether it was importing mediocre overseas experts as advisers, selling off New Zealand government businesses to foreign companies, or removing assistance to New Zealand industries and leaving them to deal with the world by themselves without any government assistance. These people seem so enamoured with the US model, that they wanted to covert New Zealand into an idealised version of little America.

Their antagonism to nationbuilding puzzled me, even the more so after The Dictionary of New Zealand Biography asked me to provide the entry for Bernard Ashwin, Secretary of the Treasury from 1939 to 1955, and arguably New Zealand’s greatest public servant, for he is the founder of the modern Treasury and was involved in every major decision between 1932 and 1955. Ashwin was a conservative, and yet he was as much a nationalist of his times as was my generation of the 1960s. That led to two fundamental insights: a commitment to nationhood was not a peculiarity of the political left but held by New Zealanders elsewhere in the political spectrum; and it was not a peculiarity of my generation either.

The more I studied Ashwin, the more I realised what an extraordinary group he was involved with. Out of the carnage of the First World War, out of the wreckage of the Great Depression, a group of servants of the public attempted to build a Jerusalem in our ‘green and pleasant land’. They did so practically, drawing on what theories were available and what experiences of other countries seem relevant. They kept in touch with ordinary New Zealanders and their aspirations, perhaps because the Nationbuilders never forgot they had experienced similar hardships when they were young too.

The pantheon of mid-century nationbuilders is long: Gordon Coates the politician who began it all, Ashwin, prime minister Peter Fraser; James Fletcher founder of a company that helped build New Zealand; Fintan Patrick Walsh who lead the union movement. I could have added others: Clarence Beeby built the nation’s education system; Bernard Ferguson turned a motley group of New Zealanders into a formidable fighting unit; … The potential list is long, but the book is long enough anyway. I did include Douglas Robb who contributed to the founding of the public health system and Greenlane’s world famous heart unit. And of course our writers and artists – like Denis Glover and Colin McCahon – contributed to our unique vision of being a New Zealander.

The nationbuilders were a looser grouping in the postwar era. (At one stage many of the mid-century nationbuilders were all working in the same building, some with offices next to one another.) While Sutch and Kirk were key, so was Henry Lang the second great Secretary of the Treasury. Others were outside the inner confines of government, like Bryan Philpott, who constructed models which quantified Sutch and Lang’s economic ambitions, and Sonja Davies who worked through the union movement for women, for peace, and for New Zealanders.

In his own way Rob Muldoon was a nationbuilder, but unlike the other politicians in the book he was a conservative, trying to hold back New Zealand to the world in which he grew up – one in which the Maori and women were expected to conform to the male model of the past, and which exploited the environment rather than was sensitive to it. The post-1984 elite saw themselves in opposition to Muldoon, and in doing so they set themselves against the nationbuilding tradition to which he belonged. Their negativism meant they did not link up with women, Maori and environmentalists, who broadly rejected the rogernomic policies but wanted to move forward from the twentieth century nationbuilders.

The colonialists failed in terms of even their own limited aims of higher economic growth. Yet many remain in charge of our businesses (where more often than not they are but branch managers for a overseas owned firm), government department, university departments, and political lobby groups. They have added defeatism to their cringe. Their policies failed, therefore New Zealand failed. (After all they said there was no alternative.) They seem to see the only solution to the nation’s woes is to become eventually a state of Australia or the US.

The Nationbuilders would deny that. The prospects for New Zealand must have seemed just as disastrous in the early 1930s. But they rebuilt New Zealand into an economy that even the defeatists claims was among the highest per capita producers in 1950, and which grew at broadly the same rate as the rest of the rich world between 1932 and 1985, before the colonials took over. Today we are told that New Zealand is too far from the rest of the world. But by any sensible economic measure we are closer today than at any in the past. If distance was not an overpowering handicap then, why has it become so now?

Is there an alternative to New Zealand surrendering to the forces of defeatism? The answer to that question is ‘of course’. The difficult questions are which of the nationbuilding strategies is the best, and how are we going to mobilise the political leadership to implement it? We can learn a lot from those who went before us. They were not dismayed by the enormity of the task, but succeeded by application of practical theories and commonsense.

This century’s nationbuilding will have differences from the last. New technologies and new products change possibilities. The world is going through a rapid process of globalisation which is changing our external environment, for bad and for good (defeatism only sees the downsides). And we have to respond to new personal, social, and political demands. The postwar world unleashed the priority of human rights, and affluence has, among other things, meant we can be afford to be more concerned with the environment.

A major challenge is how the Maori fit into the New Zealand nation. I did not find much evidence of Maori as a part of New Zealand twentieth century nationbuilding (although many of the Nationbuilders were sensitive to Maori issues). The lacuna might be explained by recognizing the example of Te Puea building the Tainui nation. Moreover, it is unclear what a Maori nation might be, especially as globalisation is changing the very meaning of ‘nation’ and ‘state’. And if there is to be some sort of Maori sub-nation, then there may also have to be, say, a Samoan one. While the Maori have particular rights and responsibility as tangata whenua, there is a whole challenge of building ethnic diversity and tolerance into the New Zealand nation.

As big a challenge is building a society which recognises and celebrates the different situation of woman. There were some important women in the twentieth century New Zealand’s but they were generally not closely associated with its nationbuilding. It was a ‘white boy’s engineering thing’, and the rest often felt excluded. I illustrate this in the book by looking at the difficulties Sonja Davies faced. Today, it is commonplace to point to the predominance of women in top jobs. Those suffering form the LBW syndrome may want to make a lot of that, but the exact number is an accident, although we can expect a roughly equal gender split in the future. The task of articulating a vision of New Zealand in which men and women share their nationhood has yet to be made. I suspect that partly reflects those crude symbols of New Zealand: war and rugby, which do not grip women as much as they do some men. Yet women can feel as passionately about New Zealand – again Sonja Davies illustrates the point. It is a New Zealand of different symbols, but it is still the New Zealand of the Nationbuilders cared about and struggled for.

We need to avoid the LBW syndrome in either form. Mature nationhood has some of the characteristics of adulthood, when one is comfortable with what one is – warts an all. Of course one tries to achieve better, and sometimes the achievement is among the best – world class. Sometimes one learns one is doing badly in a particular area, and can do better. Let’s stop panicking when we seem to be doing badly, following up the hysteria by ill thought-through proposals, aiming for unrealistic goals. Let’s avoid the obsession of LBW and aim to be very good – world famous in New Zealand – taking pleasure when we excel and a quiet pride when we overachieve.

Can we rebuild our vision of New Zealand (or should I say Aotearoa)? I hope the book will help, by showing we did it in the past, how we did it, reminding us we dont have to be colonial defeatists. One of the worst days in Coates life must have been when he went to the trading banks in 1932 to ask them to ease the monetary pressure on the country. The bankers would not budge. On the way back, Coates – war hero, ex-prime minister, deputy prime minister, and de facto head of the government – perhaps in despair turned to the young Treasury official accompanying him and asked ‘Where do we go now?’ Ashwin did not say there is no alternative. He replied ‘We must found a Reserve Bank.’ Together they began building a nation.

The original article was accompanied by some excellent photos or nation buildersd and nation building

Going Down?: Terrorists Attacks and the Global Economy?

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

Listener20 October, 2001

Keywords: Macroeconomics & Money

There were two views on the world economy on September 10th. The optimistic conventional wisdom thought the world economy was about to enter a recession, and would be out of it by the end of this year. A smaller group, although in my view better informed and with a better recent track record of forecasting, thought the world economy was already in recession (although this is partly a matter of definition) and expected the slowdown to continue well into next year.

While the pessimists do not seem to have changed their views much, following the terrorism of September 11th, the optimists have started talking about the world recession going into 2002. It is not obvious that the day’s events resulted in any fundamental changes to the world economy, for the property damage is less than a good American hurricane (and the people damage less that what happens when Bangladesh cops one). Blaming the downturn on terrorism is exactly what the extremists want to hear, but there is little scientific justification for it. The optimists have used the terrorism to allow them to adjust their views, since the recession in its early stages has been more serious than they hoped.

It remains unclear just how long the world recession will last, and how deep it will be. We know that many firms and households have unsatisfactory balance sheets, with high liabilities relative to their assets if they are valued realistically. But we do not know whether the sheets will become exposed to the down turn (as happened in New Zealand and Australia after 1987) or whether they will work their way out of the imbalance (as appears to have been happening in the US over the last two years). There remains the dreaded possibility that the US economy could join the stagnating Japanese one which has struggled for a decade with rort balance sheets. The best bet is that this will be the worst post-war recession, but that it will be mild compared to some of the great depressions before the 1940. Yet a Japanese type long stagnation remains a significant downside risk.

Intriguingly, confidence in recent policies is beginning to crack, with some commentators pointing out that monetary policy will not stimulate an upswing. One recalls the Keynesian wisdom that monetary policy can be as effective as pushing on the string of a descending balloon. That has been the Japanese experience. There are increasing calls for fiscal stimulus – running a large government deficit, and even subsidising key industries. The conventional wisdom may be offering very different nostrums this decade compared to the ones it offered in the last.

Under the optimistic scenario of a relatively short world recession, New Zealand’s export sector was expected to falter as its prices and sales fell, but the optimists thought that the domestic sector of consumption and housing construction would lift, bridging the external sluggishness until the early (so they thought) international recovery. However a longer world recession would hit New Zealand with rising unemployment, and stagnation or worse. The good news is that the New Zealand government goes into the world recession with the strongest fiscal position, I can recall. The public debt is not high by international or past standards, and neither is the ongoing borrowing (which funds new investment and rolls over debt). The Minister of Finance was right to say that government will switch over to deficit financing if things get too rough. The public balance sheet allows that to be a prudent action. Of course every lobby group will demand extra spending or tax cuts in their self interest (and election year will add to the clamour). However, assuming the world does not collapse into a depression, counter-cyclical spending is required. Such spending has to be reversible (so it can be turned off when the economy recovers) and to have as low import content as possible (to get the maximum employment effect). The range of prudent measures is smaller than the outcry will suggest.

I am less confident about the balance sheets of New Zealand businesses. Did they learn from 1987 crash? The most dangerous phrase during a business downturn is ‘this time it is different.’

While it suits the optimists to blame the terrorist attack for a more serious recession than they had been previously forecasting, the irony is that it may actually shorten it. The hysteria of the anti-terrorist campaign may enable the US to run a more stimulating fiscal position, since ideological conservatives find it hard to speak against spending on warfare. The US Congress has already voted the equivalent of a year of New Zealand’s GDP to combat terrorism, but the ‘war’ may well end up like the Vietnam morass which led to the long upturn in the 1960s (and inflation). Even so, fiscal stimulation has not ended the Japanese stagnation, because they have never really addressed their rort balance sheets.

A Layperson’s Guide to the Economic Cost Estimation

This entry was posted in Health, Index on by .

Chapter 2 from the International Guidelines for Estimating the Costs of Substance Abuse (2ed) written by  Eric Single, David Collins, Brian Easton, Henrick Harwood, Helen Lapsely, Pierre Kopp and Ernesto Wilson. I did the first draft of this particular chapter, and then we collegially revised it. (WHO, 2001) see http://www.eastonbh.ac.nz/?p=108 and   http://apps.who.int/bookorders/anglais/detart1.jsp?sesslan=1&codlan=1&codcol=15&codcch=561)

Keywords: Health;

2.1 Introduction

Like other professions, economists rely on a substantial body of common understanding, which they assume in their professional communications. As a consequence, non-economists can be confused by the writings and conversations of economists, even though these communications may be perfectly intelligible within the profession. This problem of communication with outsiders is especially unfortunate where the issue involves other professions, as is the case in the multidisciplinary field of substance abuse.

Thus it is appropriate to begin the discussion of economic cost studies by elaborating for the non-economist the implicit assumptions that the economists use. Simplification has been necessary, which means that some of the subtlety of the professional discourse may be lost. Obviously then, this discussion cannot cover all the points in the guidelines, nor does it superseded them. But hopefully it will enable those from other professions involved with substance abuse to have a better insight into the issues which trouble economists.

The discussion in this section is organized around three interrelated topics: what economic cost studies are, what different approaches may be taken to estimating economic costs and what economic cost studies are not.

2.2 Economic cost studies

In brief, the study of the economic costs of problems associated with the use of psychoactive substances is (1) a type of cost-of-illness study (2) in which the impact of substance abuse on the material welfare of a society is estimated by examining (3) the social costs of resources expended for treatment, prevention, research and law enforcement, plus (4) losses of production due to increased morbidity and mortality, plus (5) some measure for the quality of life years lost, relative to a counterfactual scenario in which there is no substance abuse. Each part of this statement bears elaboration.

2.2.1 Economic cost studies: a type of cost-of-illness (COI) study

The evaluation of the economic and social costs of substance abuse belongs to the genre of cost-of-illness studies (COI). Superficially a COI study involves combining an epidemiological database with financial information to generate an amount valued in monetary terms which purports to say something about the costs to society of a particular disease. Typically the magnitude is large, or large enough, to be used to draw attention to the condition as one to which policy makers, research funders, and researchers, ought to pay attention.

It will be clear from the intensity in which economists debate each calculation, that they have in mind some conceptual framework. The total is not just some gee-whiz figure designed to give a significant place to this or that illness in the public debate. So what are economists think they are doing? Moreover, why do they disagree?

At the heart of the economist’s approach is that all relevant costs are opportunity costs, that is one activity (such as an illness) prevents resources being used for some other purpose, and so an opportunity is forgone. Thus COI studies rest on the proposition that if the illness were not to exist, then the resources that a society uses for treatment and other related purposes could be deployed in some other way.

Sitting behind the opportunity cost is a counterfactual scenario, that is, a description of an alternative state of affairs, by which the opportunity cost would be assessed. Often the counterfactual proposition is not controversial. For instance we might assume in a COI study of some viral infection, that the alternative scenario was no viral infection.

In substance abuse the alternative can be more arguable. For instance, the counterfactual to a situation of alcohol abuse might be that the abusers switch their consumption to mineral water and other health enhancing commodities, or it might be that abusers switch their consumption to narcotics. The latter is an extreme example, and usually a COI study assumes a switch to non-damaging activities, but sometimes the specific counterfactual situation is unclear.

However, it is not the counterfactual proposition which causes the most dispute between economists. More often the disagreement arises over what should or should not be included as a cost, as well as how that cost is to be valued or measured. These differences do not arise because of different underlying fundamental frameworks, but because the common framework has been applied in different ways, so practical considerations have led to the treatment of the same issue in different ways.

This is true for COI studies. The fundamental framework is “value theory”, the role and interpretation of market price, which has been developed rigorously over the post-war period. Two practical applications of that theory are (1) in the System of National Accounts (SNA) and (2) cost-benefit analysis (CBA), which is a method of evaluation of alternative actions or treatments.

An integral assumption of value theory is that consumers value their own consumption, and that they rationally seek to maximize the value of their consumption as best they can, subject to various limitations such as their income and borrowing power. Thus, it is assumed that when a person buys a potato, a beer or an illicit drug, the cost of the purchase is offset by the benefits the consumer obtains from its use. Many who are knowledgeable about alcohol, tobacco and drug dependence would challenge the veracity of this assumption. Addictive behaviour seems to violate the assumption of rational consumer behaviour. How then is the economic analysis to deal with this situation?

One approach is to treat the psychoactive substances as conventional commodities, assuming that even dependent users are consuming rationally, according to their lights if not that of wiser counsel. In this case the perceived benefits of consumption exceed the outlay on the substance, and the transaction is treated as rational, just as purchases of other commodities, such as potatoes.

Collins and Lapsley offer another approach, which attempts to modify the assumption of rational consumer behaviour in value theory, without destroying the entire paradigm. [1] They estimate a proportion of drug consumption which is judged to be abusive. For that portion of consumption, they treat drug expenditure by users as zero under the counterfactual scenario in which there is no drug abuse, on the basis that dependent users receive no benefit from use. (Indeed, many users wish they had never taken up drug use.) This permits them to count expenditures on drugs by dependent users as a cost in the current actual scenario. This is a plausible alternative, which does not undermine value theory, although it leaves the difficult task of determining what proportion of substance use is dependent use.

The problem of how to resolve additive consumption with the assumption of rational consumer behaviour is not fully resolved. The key point for the non-economist is that a main objective of the economist’s approach in economic cost studies is to retain the well-established value theory paradigm, but to adapt it for the consumer behaviour which addiction implies.

2.2.2 Costs to whom?–cost studies in the System of National Accounts framework

Newspaper stories often cite “costs” of various social problems or negative events, such as the loss of a business convention, the impact of poor weather on tourism or the dire economic consequences of a professional sports strike. Frequently, such estimates lack credibility, as costs are magnified by following the flow of dollars from one party to the next, with little or no consideration of alternative uses for the money. For example, the money spent by a tourist or baseball fan at a restaurant is counted, then the money spent by the restaurant to food wholesalers, then the farmer’s income, as well as income and other taxes paid by workers at each stage, and so forth. The fact that the money spent by local residents could have been used for alternative purposes is not considered. It is not surprising that cost figures such as these are viewed with scepticism. A cost for one person is typically a benefit to another. To the business manager who no longer has pay for his or her staff to attend the cancelled conference, to the potential tourists who stayed at home and to the baseball fan whose game was cancelled by a strike, the “costs” of these cancelled events are really savings.

In short, to be credible, estimates of the costs of substance abuse must be clear with regard to what constitutes a cost, who bears these costs, and the boundaries which should be placed on the economic ramifications of negative impacts.

Cost-of-illness studies are quite precise in this regard: they estimate the impact of illness on a measure of material welfare in a society, closely related to the Gross Domestic Product. The GDP is generated in the System of National Accounts (SNA) by combining expenditure and production data with accounting information to produce an aggregate statistic valued in monetary terms. The Gross Domestic Product is not an arbitrary set of decisions about what is to be included and how each item is to be valued. Rather the aim is to encompass all market transactions valuing them at their marginal private value (or utility), which is usually equal to the market price (including indirect taxes). An increase of so many monetary units in the GDP can be interpreted as an increase in the sum of consumer utility of the same amount of monetary units.

In order to appreciate the significance of COI estimates in this framework, consider the counterfactual situation where people choose not to eat potatoes, but switch their expenditure to other products (say pasta). Clearly there will be a disruption among potato producers, but this will be offset by an expansion of pasta production. We take these two effects as (largely) balancing out, in which case there will be no change in GDP, even though there is a change in the composition of GDP.

What, we might ask, is the cost-of-potatoes to the economy? An answer might be that it is the cost of production and distribution. However, this is offset by the benefits to consumers of eating potatoes. More formally, we see that in the counterfactual situation, where there are no potatoes (but there is more pasta), there is no change to GDP. So we assess the social cost-of-potatoes to be zero. Note that we are not here assuming that the cost of potatoes are zero to consumers. They are a real cost to them but it is assumed to be offset by the benefits to them of the potatoes, and which is taken into account when they make the (private) decision to buy them.

2.2.3 What constitutes a cost?–social vs. private costs

Thus, where the costs of a commodity are largely limited to private costs, the economic impact is estimated at approximately zero. None of this should appear extraordinary. What is unusual is when we consider the same situation as it applies to a psychoactive substance prone to abuse, which carries social costs as well as private costs.

To simplify, we shall illustrate the argument with tobacco, because it is probably the simplest of all the drugs, and its economic impact is the most transparent. [2] This time our counterfactual scenario is that there is no tobacco consumption, and there has been none in the past, so that smokers switch their consumption to some standard commodities (such as potatoes). In effect we are assuming that tobacco was never introduced to the society under consideration, and that potential smokers did not choose another drug (such as cannabis).

At first it might appear that this story was no different from the one about potatoes. But tobacco generates ill health, which requires medical care. The lack of smoking would mean that a significant quantity of medical resources would no longer be need for the care of smoking induced sickness, and could be used for some other purposes. (It would also result in other savings, such as the cost of cleaning up litter and the costs of smoking-related fires.) The counterfactual is a little vague on what exactly is the alternative, but in the context it is not likely to matter. What is critical here is that we have a resource use consequent on the smoking, which is not being offset by some benefit to smokers when they decided to smoke.

The terminology which is being used here differs from that used in most of the Economics literature on the subject. What we here call “social costs” are usually called “external costs” or “externalities” in the literature. Costs which accrue only to the people engaged in the activity in question (for example, the consumption of alcohol or tobacco) are called private costs. Thus the normal economic terminology is that private costs plus external costs equal social costs. It can be argued, however, that to the layperson the use of the term “social cost” to describe the costs which are imposed upon the rest of society is more intelligible. Thus, in the rest of this publication the phrase “social cost” has this meaning (that is, what the economist calls “externalities”).

Why is so much attention paid to the distinction between private and social costs and benefits? As the Australian Productivity Commission report on gambling states (1999, p. 43), it is not because private costs are unimportant. In fact, often they are far more significant than the social benefits and costs of an activity. Rather, private costs generally do not justify government action on the basis that:

  • individual actions based on adequately informed and rational decision-making will generally accord with the best interests of the individual concerned;
  • if there are no impacts on other people resulting from these actions which are not accounted for, then what is in the individual’s best interests will also be best for society; and
  • if this is the case, there is no way that governments could intervene in individuals’ decisions that would improve the welfare of either the individuals concerned or society more broadly (Australian Productivity Commission, 1999).

Thus the existence or private benefits and costs does not normally provide a justification for government intervention, unless the distribution of private benefits and costs is seen to be in conflict with society’s concept of fairness. It can be argued that if lack of fairness is a problem it would be more efficient for the government intervention to take the form of broad social security or tax measures rather than measures targeted specifically at the activity under review. It may, however, be that a particular public sector intervention designed to reduce external costs will influence the size and distribution of private benefits and costs. In these circumstances public policy should not ignore private benefits and costs.

The key distinction appears to be between the private costs which rational and fully-informed smokers incur by their own activities, and the social costs which are borne by others. However, the distinction is in reality more complex than this. Consider the case of a substance abuser, say a smoker. Conventional economic analysis of consumer behaviour assumes that rational consumers will undertake an activity only if the private benefits received at least equal the private costs of that activity, so that there is almost certainly a positive net benefit in the form of what is known as “consumer surplus” (the difference between what consumers would be willing to pay for a good or service and the market price that they are actually required to pay). Consumers are better off, in their own estimation, as a result of the consumption activity.

But this analysis refers quite specifically to the costs as perceived by the consumer. What if consumers (say smokers) are uninformed or misinformed as to the costs which the consumption imposes on them? For example, smokers may not be aware of the full health consequences of smoking (perhaps as a result of ignorance or of misinformation resulting from advertising) or they may not realise that the highly addictive nature of nicotine means that quitting will turn out to be much more difficult than they expected.

If the smokers’ actions are determined by perceived costs that are less than their actual costs, the difference between the two is a social cost even though it is borne by the smokers themselves. This is because the smokers have not adjusted their behaviour in response to these unperceived costs and so these costs are unaccounted for. The smokers are not necessarily behaving irrationally. They are simply adjusting their behaviour to the best available, relevant information. It must be emphasised that costs borne by the substance abusers themselves can represent social costs if these costs have not been knowingly incurred.

It is sometimes suggested that these types of study should also estimate the extra value to the abusers (for example, the benefits to smokers of smoking) over and above the costs to them of that activity, and that these net private benefits should be set off against the social costs. However, from the point of view of public policy, it is social costs that are relevant, not private costs. In determining the appropriate levels for society of any activity, government is interested in the costs that this activity imposes on the rest of the community. As an illustration, in determining the appropriate levels of activities such as pollution, environmental degradation or even violence, society does not take into account any private benefits that the perpetrators may enjoy. They are seen as being irrelevant to the interests of the community as a whole. In the same way, studies of the social costs of substance abuse should estimate only the net social costs.

In COI studies, only the social costs are considered. Some of the medical costs may fall upon the smoker if, e.g., there is a co-payment for public care or if smokers pay higher medical insurance premiums. Other institutional arrangements may require similar careful distinctions between the payments the smoker contributes to medical care (and other expenses) and the payments from other sources. These costs are not part of the costs-of-illness, but a part of the private costs borne by smokers, just as they pay the costs of their cigarettes.

Social costs may be incurred by other persons in the private sector (e.g., when private insurance premiums are increased due to payouts to smokers) as well as by public sector expenditure. Thus, in the context of COI studies, “social” is not a synonym for “public”, nor “private” for “private sector”.

Another issue which arises in relation to drug abuse, is whether costs imposed by abusers upon other members of their own family constitute private costs or social costs. On the one hand, it is argued (or asserted) that potential substance abusers will take into account the effects on other family members in deciding the extent of their substance abuse and that these costs are, therefore, internalised as private costs. On the other hand, how can we ignore the costs of substance abuse upon other people who have had no part in the initial decision and who may find the effects intolerable (for example, resulting in marriage breakups)? The size of abuse cost estimates will depend very significantly on whether family costs are treated as social costs. Practical questions will also arise about what constitutes a family member – de factos, same sex partners, in-laws etc. It is, in fact, difficult to believe that the effects of substance abuse on other family members should be considered to be solely private costs.

Measuring the social costs of substance abuse is no easy matter. There is strong evidence, for example, that the consumption of alcohol is related to a variety of health consequences. The probability and severity of adverse health effects of alcohol are strongly related to level of intake, often in a non-linear fashion and sometimes in a manner which is also situation dependent (as with regard to accidents). The dose‑response relationship is most evident with respect to cirrhosis of the liver, but adverse effects of high intake of alcohol have also been found for many other disorders including delirium tremens, impaired brain function, cancer of the esophagus and digestive tract, chronic calcifying pancreatitis and congenital defects in the fetus among pregnant women. High and even moderate alcohol use is also associated with increased risk of trauma, such as that caused by impaired driving accidents.

The proportion of each of these causes of morbidity and mortality which can be attributed to alcohol use must be estimated, ideally for different age and gender groups. Where large-scale population based epidemiological studies have established the relative risk of particular disorders at different levels of alcohol consumption, the attributed fractions of alcohol-related morbidity and mortality can be determined with a fair degree of confidence. In many situations, however, such studies are lacking, and one is forced to estimate the attributable fractions from less reliable sources, such as studies of the excess morbidity and mortality among clinical populations. In such cases, one is forced to make the dubious assumption that rates of morbidity and mortality in the general population of heavy alcohol users can be estimated from clinical populations.

For other adverse consequences of alcohol use, the issue of causality can be even more daunting. For example, consider a person who consumed alcohol prior to committing a crime. Even if this person had been intoxicated, it is not clear whether the crime can be attributed to alcohol consumption. The alcohol may have caused the person to become aggressive or less inhibited, or precipitated the crime in some other fashion. On the other hand, the person may simply have happened to have a few drinks before engaging in a crime which he or she would have committed anyway. Alternatively, the person may have already decided to commit the crime and used the alcohol “for courage”. Thus, even when drinking immediately precedes a criminal act, the attribution of alcohol as a causal factor in the crime is not at all clear.

Furthermore, the attributable fractions for each disorder vary between societies and within societies over time, so no one set of attributable fractions can be applied to all societies. Thus, the assignment of medical costs associated with adverse health consequences arising from the use of a particular substance such as alcohol is a very complicated and difficult task.

2.2.4 Further costs: productivity losses

The reduction in medical expenses in the counterfactual scenario is not the only important change as far as GDP is concerned. Total production may be increased because the former substance abusers are more productive at work, with lower morbidity and lower absenteeism. This additional production under the counterfactual scenario is the productivity loss from substance abuse in the actual situation. [3]

It is possible that to a certain extent, smokers may carry the burden of the lost production themselves, e.g. in lower remuneration. In practice, however, it seems unlikely that the entire burden of the productivity loss is carried by the smoker, and that at least some is carried by the employer in lower profits, by other employees in lower wages, and/or by the taxpayer in lower tax receipts. These losses are a part of the COI.

2.2.5 The ultimate cost: placing a value on life itself

There is one further major difference between the actual situation and that of the counterfactual which factors into economic cost studies. Substance use and abuse may cause death. Compared to the counterfactual scenario, the population is less. The resulting lower production should be included as part of the COI, by considering the loss of income due to premature mortality.

But what are we to do about the deaths of those who are not in the workforce, such as homemakers and the retired? It is insufficient to ignore this loss of life due to substance abuse. There must be an explicit recognition of the different life years experienced under the two scenarios. As discussed in Section 4, a dollar value can be assigned to the labour of persons outside of the workforce, and in the case of retired persons, some measure of the value of life years lost must be assigned. Better still life years should be adjusted for the quality of the living experience. Someone suffering from terminal cancer is not experiencing the same quality of life as their non-smoking equivalent who is leading a full life.

It is not easy to value these life years or quality life years (QALYs). Insofar as this is an appropriate thing to do, the difference between the actual situation and counterfactual scenario is a part of the COI.

The notion of placing a dollar value on human life is troublesome to many. Some cultures and religions could not contemplate doing so. What right have economists to place a dollar value on life?

Unfortunately, when it comes to policy advice, an economist cannot always avoid putting some value on life. Consider the question of whether to install traffic lights at a crossroad, one of which effect would be to reduce accidents which lead to deaths. If the evaluation ignored lives saved by the lights, that would be equivalent to treating the value of life as zero. As a result some life saving traffic systems would not be recommended. On the other hand if the value of life was set as infinity, every traffic system which reduced the probability of death, no matter how small that probability, would be installed, with the result that we could barely move given the density of life saving traffic lights.

So in practice we incorporate some value of lives saved, when we make policy decisions, even if a dollar value is not stated. All economists are doing explicitly is what others, policy advisers and policy makers do implicitly.

The issue of placing a value on human life cannot be avoided by ignoring the issue, for that would be equivalent to setting the value of life at zero. However, because economic cost studies do not strictly offer policy advice, they can avoid the issue by enumerating the number of years of life lost due to premature mortality without placing a dollar value on those years. For example, the result might be reported that the annual cost of a particular illness was $100 million plus 10,000 quality life years lost. That meaning would be that under the counterfactual scenario, there would be $100 million of extra resources for consumption, and 10,000 additional quality life years saved.

However the cost of another illness might be $50 million plus 20,000 quality life years. Some may wonder which illness is the more costly, a question that can only be answered by combining the dollars with the quality life years in some way. Whatever way would be equivalent to putting a value on life. [4]

Another difficulty is that it is not clear that all life should be treated equally. This is especially pertinent in the context of substance abuse. Does the life of a chronically unemployed drunk driver have the same value as that of a young victim killed by the drunk driver? Does the life of a junkie have the same value as that of a productive, law-abiding citizen? The question of valuing the life of the junkie, compared to a good citizen, may turn out to be trivial, providing the counterfactual is kept mind. Suppose the counterfactual is to eliminate the substance abuse. Then the counterfactual scenario has the junkie as a good citizen, and her or his death is just as great a loss to society. Alternatively one might want to say the loss of the junkie’s life is much less valuable than that of the good citizen, because the quality of life is lower. But, in addition, the counterfactual scenario is about the recovery of that low quality life to a standard one. Thus the total valuation, summing the two components, will be the same as the loss of the good citizen’s life. The COI study includes the value of the existing damage to the life of an addict, as well as mortality effects.

2.3 Demographic approach vs. the human capital approach

There are two different approaches to the estimation of the economic costs of substance abuse: the more widely adopted “human capital” approach and the more recent “demographic” approach. The key difference, discussed in detail in Section 4, concerns the manner in which the costs of premature mortality are treated. In the human capital approach, the lost value of a deceased worker’s production is estimated by present earnings plus a discounted rate of future earnings. In the demographic approach compares the actual population size and structure to that of an “otherwise healthy” population, i.e. an alternative population in which there were no drug-related deaths.

The key point is that these different approaches are complementary rather than contradictory. The demographic approach addresses the question: “Suppose there had never been any substance abuse or problems associated with the use of psychoactive substances?” The human capital approach addresses the question: “Suppose all substance abuse and problems associated with the use of psychoactive substances were to end today?” The human capital approach generates an estimate of the present and future costs due to drug-related mortality in the current year, while the demographic approach estimates the present costs of drug-related mortality in past and present years.

Because these two alternative approaches to the estimation of the economic costs of substance abuse address different questions, it should not be expected that they would arrive at the same answers in all circumstances. During a period of increasing or decreasing consumption, one would expect somewhat different results. It is only during a prolonged period of stable consumption with no major impact from treatment or prevention programming that one would expect to achieve equivalent results.

Thus, there is no need to reconcile the two approaches. The need is to be clear about their origins and significance. The choice depends on the counterfactual situation being addressed. The preferred procedure will often be to conduct economic cost studies which utilize both the demographic and human capital approach, and compare the results. [5]

2. 4 Prevalence vs. incidence based approaches

Estimates of the economic costs of substance abuse may be either prevalence-based or incidence-based. Prevalence-based studies estimate the number of cases of death and hospitalisations attributable to substance abuse in a given year and then estimate the costs that flow from those deaths or hospitalisations (as well as other costs, such as prevention, research and law enforcement costs). Incidence-based studies estimate the number of new cases of death or hospitalisation in a given year and apply a lifetime cost estimate to these new cases. Thus, prevalence-based estimates generally measure the costs of substance abuse in the present and the past in a given year, while incidence-based studies generally estimate the present and future costs of substance abuse in a given year. For ongoing health and social problems such as illicit drug use, the results of prevalence-based and incidence-based estimates are often similar. For health problems that are declining in magnitude (such as smoking in some countries), prevalence-based estimates will generally be lower than incidence-based estimates. For emerging health issues such as epidemics of HIV or Hepatitis infection, incidence-based estimates generally provide higher estimates than prevalence-based estimates, because many infected persons may still be in the latency phase of the diseases. The use of prevalence-based vs. incidence-based estimates is discussed in Section 3.11.

2.5 What economic cost studies are not

Part of the appeal and desire for economic cost estimates of alcohol, tobacco and other drugs may unfortunately be based on confusion with other types of economic analyses. While useful and relevant to policy decisions, COI studies are not studies of avoidable costs, they are not studies of budgetary impact nor are they cost-benefit analyses.

First, economic cost estimates do not indicate the amount of money and life years which could realistically be saved via effective government and social policy and programming. The counterfactual situation in economic cost studies is one in which there are no problems associated with the use of psychoactive substances. This counterfactual situation is hypothetical and generally not realizable under any circumstances. The estimated costs include both avoidable and unavoidable costs. Even if completely effective policies could be found with no appreciable costs for enforcement, treatment and prevention programming, implementation would not be instantaneous and there would still be lingering adverse consequences from past use of the psychoactive substances. The calculation of avoidable costs associated with the use of psychoactive substances is discussed in Section 4.

Second, economic cost studies are not studies of the budgetary impact of alcohol, tobacco and other drugs on governments. The costs included in COI studies are in reference to the whole of society and just to the government accounts. A study of the economic costs of substance abuse would be very useful in conducting an accounting of the budgetary impact of psychoactive substances, as it would provide estimates for many of the government outlays. However, government costs do not include all of the costs imposed on the community. Further, budget impact includes consideration of government revenues and other benefits, which are not part of COI studies. The relationship between economic cost studies and estimates of budgetary impact is discussed further in Section 4.

Finally, economic cost studies do not attempt to fully consider the economic benefits of alcohol, tobacco and other drugs, and they should not be confused with cost-benefit or cost effectiveness analyses. These are two in a range of a range of tools that economists and others use to evaluate policy proposals. In the medical area they are frequently used to evaluate the usefulness of costly treatments or policy proposals (such as prohibiting drinking in certain circumstances) by, for example, weighing the costs of interventions against their benefits.

Cost-benefit analysis is based on the same value theory as COI studies, and economic cost studies can be used to provide important cost components in a cost-benefit analysis. However there are slightly different assumptions which means that cost-benefit analysis may give different outcomes and estimates. The most important differences involve the counterfactual scenario, and the treatment of the non-market sector.

Typically the cost-benefit analysis asks what would happen if the costs associated with a particular behaviour – such as tobacco smoking – were to cease from today. This contrasts with the counterfactual scenario in a COI study,  which is to ask what would happen if the smoking had never started. Even if all smoking were to stop instantly there would still be the consequences of past smoking on mortality, morbidity, and health care. For instance the public sector would still be required to provide assistance for those who smoked in the past and were in need of medical care. [6]Such social costs are unavoidable, and so are not included as a cost in the typical cost-benefit analysis. [7]

The other major difference between cost-benefit analyses and economic cost studies utilizing the SNA framework is that cost-benefit analysis has been concerned with the impact of an event on non-market activities. For instance, if the a problem of substance abuse involves keeping patients in hospital beds, and a counterfactual scenario of returning them to the community, the cost-benefit analysis usually includes the extra unpaid work that might be involved in the second scenario (as when extra house and care work is imposed on family members).

The extension of economic cost studies to cover such unpaid and non-market activities does not represent a major difficulty in principle, but it has not been given priority in development. If economic cost studies were extended to include unpaid and non-market activities and if they were able to distinguish avoidable from unavoidable costs, it would be enormously helpful for those who wish to carry out cost-benefit analyses of alcohol and other drug policies and programmes. For an economic cost estimate is almost the benefit side of a cost-benefit analysis, and if done properly it could be readily adapted into the full benefit side. [8] The reason why the COI study is close to the benefit side of a cost-benefit analysis is that the avoidable costs associated with the use of psychoactive substances represent the benefits (i.e. negative cost) in a cost-benefit analysis contrasting the current situation with a counterfactual situation in which a policy or programme is introduced. Thus there are potentially strong practical advantages to integrating economic cost studies with cost-benefit analyses.

Thus economic cost studies, while based on the same value theory, involve differences with cost-benefit analysis. Some of those differences can be eliminated with development. There is no ultimate reason why the economic cost studies in the SNA framework should ignore non-market activities. Experience derived from cost-benefit analyses in dealing with non-market activities and estimating avoidable costs will hopefully inform the further development of economic cost estimates in the SNA framework.

Finally, it should also be noted that COI studies, like most forms of economic analyses, only concern economic costs to the legitimate market economy. There may therefore be significant economic costs in drug-producing countries arising from substance misuse that are not measured in the COI framework. For example, the costs of corruption are not generally included in COI studies. Nor do COI studies generally attempt to measure costs arising from the economic disruption to legitimate business enterprises caused by large-scale illicit drug production and distribution. To do so would require a more extensive and demanding economic framework such as general equilibrium modelling.

2.6 Interpretation of substance abuse cost estimates

Estimates of the aggregate costs of substance abuse tend to attract a great deal of political and public attention. However, while the meaning of individual components of the aggregate costs (for example, the costs of health care or crime) is relatively straightforward, the interpretation of the aggregate estimates requires great care and precision. To understand this point we need to return to the distinction between the human capital and demographic approaches to estimation.

Both approaches relate to the valuation of the loss of production arising from the abuse-related deaths of otherwise productive members of society. Both approaches compare production and abuse costs in the actual situation with those in a hypothetical alternative situation which would have existed had there been no past or present substance abuse. The difference between the two approaches relates to the way in which the production costs of premature mortality are treated.

The essential difference between the two approaches is summarized earlier in the following way. The human capital approach calculates the present and future production costs of abuse-induced deaths which occur in the present year. The demographic approach calculates the present production costs of abuse-induced deaths which have occurred in past and present years.

When looking at the human capital approach we are estimating the present value of the future time stream of lost productivity resulting from abuse-induced deaths. Although we talk of the “costs of abuse in year X”, in reality a high proportion of these production costs will be borne in years subsequent to year X. In relation to the demographic approach, we are looking at the costs actually borne in year X but resulting from deaths not only in year X but also in many years prior to year X.

Thus, interpretation of aggregate estimates is difficult, but unfortunately there is no way round this problem. If we calculated the costs borne only in year X as a result of deaths only in year X, the resulting costs would be very substantial underestimates of the overall costs borne by society since we would not account for the fact that deaths can impose costs over many years, not just in the years in which they occur.

One implication of the way in which abuse costs are estimated is that the aggregate figures are not likely to change significantly over short periods of time. This is because rates of abuse and disease prevalence, the primary determinants of abuse costs, tend to change slowly. Thus it may well be a waste of research resources to undertake these estimates at intervals of less than three to five years.

Endnotes

[1] Theoretical Issues in Abuse Cost Estimation, paper prepared after the symposium.

[2] Even so we ignore the effects of passive smoking, in order to keep the story as simple as possible.

[3] Again the concept needs to be treated with care. Implicit in the counterfactual scenario is that the potential production from the greater productivity of the substance abuse is realised or, insofar that it is not, the potential is taken up in voluntary leisure with the same value as the additional production (and not involuntary unemployment).

[4] Pressed between the economic and policy logic, and cultural and religious or spiritual sensitivities, participants at the International Symposium on Estimating the Social and Economic Costs of Substance Abuse could not resolve the question of the treatment of the valuation of life. Instead it was suggested to use a deliberately clumsy term of social gains from additional (quality) life years. The term “social” is not  meant to connote a gain in a religious sense, but to indicate that society may (or may not) value any improvements in the quality of life as a result of reduction is substance abuse. In making this suggestion the proposers were aware they were putting the matter into a temporary limbo, rather than ultimately resolving the philosophical issue. That will depend upon a wider range of professions than even those at the symposium. After that resolution economists can turn to the question of the best valuation method, if any. In the interim a number of methods are advocated, their choice depending on the resolving the deeper philosophical issue.

[5] There is another variant of COI studies which might be considered a third approach. Manning and his colleagues (1991), in contrast to the studies by Dorothy Rice (Rice, 1966; Rice et al., 1985; Rice et al., 1986; Rice et al., 1990; Rice et al., 1991; Rice, 1993), strictly limits cost estimates to external costs (paid by others). Furthermore, Manning’s external cost approach is incidence-based and utilizes a lifetime model of use. Thus the cost-benefit totals represent the current value of present and future substance use.

[6] Assuming that it had done so in the past.

[7] Over time the unavoidable costs diminish, so that the CBA counterfactual scenario has a growing stream of cost savings from the smoking cessation. Typically these are discounted to give a present value of the avoided costs. Discounting amounts to summing together all those costs, but the further a cost is in the future, the less weight it is given, because it is generally taken that income and spending in the future is less valuable than the same activity in the present. Typically the weighting involves a discount rate, whose magnitude is a matter of contention among economists, although there is widespread agreement that the concept is correct in principle. It follows that not only should the costs of medical care be estimated through time, discounting them to a present value, but so should other costs such as productivity and mortality losses.

[8] A common difference is that the treatment the evaluator is looking at, may reduce but not eliminate the illness, so only a proportion of the COI items will be relevant. Sometimes the proportion will differ from item to item.

Low Politics: Local Government and Globalisation

This entry was posted in Globalisation & Trade, Governance, Listener on by .

Listener 13 October, 2001.

Keywords Governance, Globalisation & Trade

‘Subsidiarity’ is an ugly word. It comes from Germany where they designed their governmental institutions on the principle that decisions should always be taken at the lowest practical level in the hierarchy. It is now a central principle of the European Union, so that Brussels may not make decisions which can be left to the individual member states, just as the German Federal Republic devolves political power to its constituent Lander (states).

Subsidiarity has a crucial role in the proliferating international agreements of the globalising world, maintaining that multinational agreements should only cover that which is absolutely necessary and so maximizing national autonomy. The principle is not explicitly a part of the international negotiations, but it is there implicitly. Thus the Multilateral Agreement on Investment in part broke down because some big players thought it was unnecessarily intrusive in areas where they felt local discretion was practical and justified. New Zealand is not a big country, but it would be in our interests to combine with other small nations who also get bullied in multilateral negotiations, to promote an ‘International Convention on Subsidiarity’.

To promote ‘subsidiarity’ internationally, we need to practice it nationally. Arguably our national policy framework has been moving in this direction over the last two decades, when many central government decisions were devolved to individuals, who are the lowest level in the political hierarchy. There was a time in which governments of the right and the left accrued an extraordinary range of powers to themselves. But sometime in the post-war era – I identify it with the generation of the 1960s, but of course the movement was not exclusive to a single decade – there developed a scepticism towards (and indeed a fearfulness of) this concentration of political power and its associated conformity. Instead the desire has been to ‘let many flowers bloom’. New Zealand always had a high degree of social heterogeneity, but we pretended the country could be represented by a single simple dominant culture (of rugby, racing and beer). It was not just alternative lifestylers who challenged the hegemony: women did via the feminist revolution, as did Maori, not to mention individuals who desire to be different in what one wore, what one drank, what one listened too … I suspect the ‘Third Way’, stripped of its rhetoric, is more influenced by this 1960s’ favouring of devolution and individual autonomy, than by any other single doctrine.

Sometimes it is not possible to devolve to the individual, but subsidiarity says that collective decisions should be left as low as possible too. Thus the ‘Tomorrows Schools’ reforms aimed to give parents and teachers greater control over the education system, and the Ministry of Education in Wellington less. (It did not quite work out as hoped, but that is another column.) This government has moved on and is now addressing the issue of subsidiarity in local government, although its consultation document “Review of The Local Government Act” does not explicitly use the term. By offering local authorities more autonomy, the proposal makes a major break in the long tradition starting in 1876 of central government bullying local government. (While notions of devolving power are in the political winds, the two key ministers Prime Minister Helen Clark and Local Government Minister Sandra Lee, both come from Auckland City. Any sane national politician would want the Aucklanders to largely sort out their problems themselves.)

To make the local body system work properly we need two further major changes. First, a collective entity (or an individual for that matter) has little autonomy or choice without sufficient income. The question of supplementary funding sources additional to rates has sat in the too-hard basket for years. The gravest weakness in the discussion document is it is hardly addresses funding.

Second, is the election of our representatives. We still use first-past-the-post (FPP) which only makes sense if there are two candidates. Today there are usually many candidates and the electoral outcome is nearly arbitrary. In my city the local mayor is likely to be elected with about one third of the voters, with the remainder scattered among 16 other candidates. (Additionally, the voter turnout is likely to be only about half). It is not fair to a new mayor to take up the position without any genuine moral authority to lead the municipality. Subsidiarity is about effective democracy. So should be local government.

There is a proposal before parliament to allow local authorities to switch from FPP to the proportional representation method of single-transferable-vote. (MMP is usually inappropriate because most local authorities dont have – and perhaps they should not have – well formed parties.) The legislation is a good example of subsidiarity, since it is permissive rather than directive. Local bodies could stay with FPP if their voters wished. Sadly, petty politicking seems to have put the reform on hold.

This week we vote for the politicians who will not only govern our local areas (and hospitals) but who will influence the local government reform, and thus the degree of subsidiarity in New Zealand. Let’s have more of it.

Copenhagen: Can We Ever Really Know?

This entry was posted in History of Ideas, Methodology, Philosophy, Listener, Literature and Culture, Miscellaneous on by .

Listener 29 September 2001.

Keywords History of Ideas, Methodology & Philosophy; Literature and Culture

The ‘Copenhagen model’, developed in the 1920s, remains the foundation of the quantum mechanics account of the atom which physicists use to this day. Two of the revolutionary developers were Dane Niels Bohr, then about forty, and German Werner Heisenberg, in his twenties. …

… Both were to receive Noble Prizes for their work. The model’s best known element is Heisenberg’s uncertainty principle which says – this is a loose interpretation – that an observer disturbs the phenomenon being examined. In the case of atomic level activity the disturbance is such that one cannot know precisely everything. That is also true socially. The very activity of trying to describe an event may change the event itself.

Playwright (and novelist) Michael Frayn explores this in his 1998 play Copenhagen. It is 1941, fifteen years later, and Denmark is occupied by Germany. Heisenberg goes back to Copenhagen to see Bohr and wife Margrethe (a feisty woman who worked with Bohr) but the purpose of his visit is unclear. They are under surveillance. They go outside for a walk but when Heisenberg broaches his chosen subject Bohr intemperately cuts him off short and they return in minutes. After the war their two accounts are irreconcilable, and Heisenberg seems to keep changing his story. Sixty years later historians still bitterly dispute over what actually happened.

The crucial issue is Heisenberg’s attitude towards the development of atomic weapons. That meant, since he was the only great German physicist left – for the rest, often Jews, had fled – what was to be the strategy of Nazi-ruled Germany? Did he come to his mentor to get a go-ahead? Perhaps he had not made up his mind, or perhaps had he already made the decision that he would focus on nuclear power, the course which he took? (He had almost got his nuclear reactor to the critical – self-sustaining – stage when the war ended, but it did not have quite enough uranium. Importantly a reactor uses different physical processes from a bomb, although it can make the material for one.) The reason why some historian’s reactions to Heisenberg’s intentions are so intense, are because they reflect on the decisions of those who made the American atomic bombs, eventually dropped on Japan.

Frayn, whose background is in philosophy, reenacts these events in a discussion among the three now-dead participants. Throughout the London production I was on the edge of my seat. (Perhaps not: sometimes I was in tears, and not sure where I was.) Heisenberg is torn between his commitment to his family, to his country, to his profession, and to his professional competence. Yet the wrong decision might help the Nazi regime. (There is no hint in the play he favoured fascism, except in the way that unthinking patriots can be blind to rather despicable national leadership.) An especially painful moment was when he reported that after the war those who made the American bomb would not even shake his hand – a reflection of the view that the anti-nuclear movement detested: our bomb is honourable but the enemy’s is evil

Some of the subsequent confusion arose out of Heisenberg’s unwillingness to admit he had made a mistake, and perhaps let his side down. He overestimated the uranium required to make a bomb, probably the major factor in Germany not proceeding. The other side also made a miscalculation, a proportionally bigger one, but it was an underestimate, and so the Allies went ahead. (Ironically, that slip was first made by Jews who had fled Nazi persecution.) It is very human – especially where there is a policy implication – to make a mistake which favours the outcome one wants. If it goes the other way, you rework and rework the calculations until you have eliminated all error, or got your preferred answer.

Thus the play is not so much about some crucial event in the history, but about the agonising moral dilemma that one man faced. Potential theatregoers need not be put off at having to follow the intricacies of the Copenhagen model. Those who saw the play, usually tell me they either understood the play’s exposition, or it did not matter. (Hopefully some entrepreneurial Auckland physicist will take the opportunity to give a public lecture. A citizen ought to have some understanding. Even for physicists at the time, there was bewilderment. Hence Einstein’s remarks that God ‘does not play dice’ and ‘He is subtle but not malicious.’ Physicists’ understanding of subatomic behaviour has since got murkier, although they may be near a new synthesis. I comfort myself with J.B.S. Haldane’s intuition that not only is the world weirder than we understand, but it may be a whole lot weirder than we can ever understand.) And over this dilemma presides the uncertainty principle. Can historians know what happened? Can even the participants?

This column may not seem to have much to do with economics. But dull would be an economist who was not gripped by one of the twentieth century’s greatest intellectual achievements. Or one who was not gripped by one of its great plays.

Four Books on New Zealand Broadcasting (review)

This entry was posted in Political Economy & History on by .

Prometheus 2001, Vo1 19, No 3, p.265-6.

Keywords: Political Economy & History;

P. Day, Voice and Vision: A History of Broadcasting in New Zealand, Volume Two (Auckland University Press in association with the Broadcasting Trust, 2000). 456pp.
P. Day, The Radio Years: A History of Broadcasting in New Zealand, Volume One (Auckland University Press in association with the Broadcasting Trust, 1994). 352pp.
B. Spicer, M. Powell & D. Emanuel, The Remaking of Television New Zealand: 1984-1992 (Auckland University Press in association with the Broadcasting Trust, 1996). 207pp.
I. Carter, Gadfly: The Life of James Shelly (Auckland University Press in association with the Broadcasting Trust, 1993). 339pp.

These four books give a good overall account of the way in which New Zealand has developed and implemented broadcasting problems over the 80 years, with Day’s two volume history providing an overview, Carter’s biography of James Shelly describing a Reithian-like prime mover in the development of noncommercial broadcasting up to 1950, and The Remaking of TVNZ relating the commercialising of the public owned TV channels in the late 1980s.

Like each individual, every country’s broadcasting is unique and yet faces the same universal problems. New Zealand’s uniqueness arises partly from a country as big as the British Isles with a much more difficult topography and a twentieth of the population. This is compounded by New Zealand being physically isolated – the nearest significant land mass, Australia, is three-and-a-half flying hours away – but culturally it is a part of the English-speaking world which provides programs for much larger audiences far more cheaply per viewer. Thus, there are physical and funding problems of providing national coverage in both the geographical and cultural senses.

All broadcasting systems face the problem of the balance between commercial and noncommercial provision. New Zealand’s solution until the late 1960s was to have a publicly owned monopoly with some parts funded by a broadcasting fee and others by advertising, but with the two intricately mixed up in the technological provision and financial accounts: the sole television channel had advertising-free days each week.

The monopoly first broke down in the late 1960s with the establishment of private radio (precipitated by an offshore floating pirate broadcaster), and in the 1980s a third privately owned television channel was established competing against the now almost entirely advertising-funded publicly-owned pair.

The story is well told (with numerous pictures) by Day, although the overseas reader may find the anecdotes humorous but distracting. (May they remind her or him that broadcasting has played an integral role in community cohesion, and so the New Zealand reading public will find the books a repository of part of its collective memory.) His history provides an excellent background for those with an interest in contemporary broadcasting policy.

For in the 1980s the government commercialised broadcasting. There were a few concessions: two advertising free radio networks providing approximate equivalents to the BBC Radio 3 and Radio 4, the establishment of a Maori-based radio network (see below), and limited public subsidisation of some television production But the nation’s broadcasting system became dominated by commercial interests and competition. Licences to use the radio frequency spectrum were auctioned off liberally, so today there are more radio stations in Auckland that there are in Sydney with four times the population. The government-owned two-channel Television New Zealand was put onto an entirely commercial footing with its prime purpose to make profit and so it became ratings driven. There was even talk of TVNZ being privatised. The story is detailed in Spicer, Powell and Emanuel which nicely captures the flavour of the reforms by almost totally ignoring such indicators of broadcasting performance as program quality and mix, and audience satisfaction.

In fact audience satisfaction has not been high for television, although there has been more approval for radio because the diversity stations have met the needs of the increasingly heterogeneous community. As a result the recently elected Labour-Alliance government is trying to reorient TVNZ to a more public purpose focus. Day’s history only goes up to 1999, so it provides a historical foundation for the new developments. It does the same for the technological challenges that now face the industry from satellite, internet, and so on. Indeed, his book shows that broadcasting has been far more technologically driven in the last 40 years than one might at first suppose.

The other great challenge to broadcasting policy has been the demands of the Maori, the indigenous people of New Zealand (15 percent of the population are of Maori descent, but most of them are of European descent too). They have acquired a government-funded radio net work and are shortly to have a government-funded television channel. Of course the issue is particular to New Zealand but it also reflects the wider problem of how to respond to the broadcasting needs of minorities. Again Day’s history sets the background for current developments.

So while the peculiarities of New Zealand may suggest these books are of local interest, probably one of the most promising areas for the development of understanding of broadcasting policy is by way of cross-country comparisons as each country faces the same problems but adopts different solutions. The world’s broadcasting scholars are fortunate that New Zealand’s Broadcasting History Trust has been able to support so many studies and that Professor Pat Day, in particular, has done such a fine job in responding to the opportunities that it created.

Auckland in a Globalised World

This entry was posted in Growth & Innovation on by .

Presentation to the Sustainable Auckland Congress, 18-21 September 2001, published in The Proceedings of the Sustainable Auckland Congress. (Edited by M. Daly, B. Hill, L. Lucas, J. Salinger, & P. Spoonley, and published by the Sustainable Auckland Trust.)

Keywords Globalisation & Trade; Growth & Innovation

I want to begin with affirming one element of my basic framework. The dominant single feature of New Zealand over the last two centuries has been its ongoing interaction with the rest of the world. Unless one understands that principle, New Zealand’s history makes no sense. Unless one uses the principle one can neither understand the future, nor meet its challenge. Insulationist policies – either practically or indirectly by ignoring the principle are bound to fail.

The principle of focussing on the interaction with the rest of the world means that because Auckland is a significant component of New Zealand its development has to be thought about in the context of the world development. I am glad of the opportunity to be able to raise the issue with a conference on Auckland’s future.

At the moment the term used to summarise trends in the world economy is ‘globalisation’. Unfortunately it has a host of definitions – including ‘international capitalism’, ‘American imperialism’ – or it is defined by particular activities – foreign investment – or particular institutions – IMF, the World Bank, ITO … A more analytic approach uses the definition that globalisation is the consequences of decreases in the costs of distance. That puts the various phenomena which the other definitions use or imply, into a framework, which among other things recognises that at other times globalisation has also been important.

The last great bout of globalisation – many economic historians call it the greatest bout – occurred in the nineteenth century, when railways, shipping and telegraph all contributed to a marked reduction in the costs of moving people, goods, investment, and information. Especially for Europe and its dominion colonies and for North America, the world became much smaller. There was more trade, more migration, more foreign investment. New Zealand, as we know it today, is a consequence of nineteenth century globalisation, not only because the majority of us have ancestors who moved here then, but because refrigeration lowered dramatically the cost of exporting meat and dairy products to Britain, and thus made possible the pastoral economic development which shaped the nation’s history.

Why globalisation is a problem is that cost of distance decreases for different things differently. It now takes microseconds for information to flit around the world, but it is two days for a person to travel the same distance to Europe, albeit considerably less than when my ancestors came here. Shipping there is still in the order of weeks, but not months, while my heart will never leave its turangawaewae.

If the cost of distance is falling why do we have cities? If distance was free, would we not all live evenly spaced out on a plain? Yet nineteenth century globalisation saw an increase in the size of cities, not a diminution, for broadly two reasons.

The first is economies of scale. The costs of transport make it necessary it to locate production units near consumers. As transport costs fall, production can be concentrated in fewer and fewer plants, since the cost of supplying the output to the consumer becomes less important. By itself that does not generate cities. New Zealand’s largest manufacturing plant is at Kawherau, while one of the biggest dairy factories in the world is at Te Rapa, close to their resources. But many plants and businesses need not be, if their transport costs are small. This applies especially for services as well as many manufactories.

Additionally, the interaction of economies of scale with the second phenomenon – specialisation – favours cities. The specialisation may be in terms of the production process including the supply of particular skills and services to a production process, or it may be in terms of consumption and leisure opportunities. Thus Auckland does not just offer more patent attorneys than, say, Nelson, but additionally the collective experience of those attorneys will offer a far wider range of skills than are available to the Nelson inventor. And what does the attorney do for leisure? If he or she is a theatre buff, there are many more opportunities in specialist Auckland than generalist Nelson. Nor should we forget that a city enables a family to live together and yet work in quite separate businesses – another form of specialisation.

So when a firm is thinking about the location of a plant it will tend to favour a large city because it can get specialist inputs and services, and because it is may also offer its managers and workers a reasonable quality of life. There may be other factors – Auckland as a transport hub and as a provincial centre for the top of the North Island region are important – and there may be offsetting ones – skiers are far more likely to want to locate in Christchurch.

Now this interaction between scale and specialisation is extraordinarily powerful, so much so that many of the cities of the world have continued to grow despite congestion, environmental deterioration, and social disarray. However, this growth does not lead to the conclusion that the city fathers and mothers should ignore these downsides. It may well be true that a business is willing to discount the economic and social bads, when considering whether to site a plant in Auckland or Nelson, but that is rarely the real choice. More likely the footloose international business looking at Auckland is also considering Australian cities or even further ashore. Congestion and other bads become very relevant.

The logic is that Auckland should eschew competing for business and jobs from anywhere else in New Zealand. That simply adds to its infrastructural, environmental, and social deficits. Auckland is such a large and crucially placed part of New Zealand that it already benefits from the prosperity of any other region. Sometimes for commercial reasons businesses will consolidate their operations in Auckland at the expense of other New Zealand centres. Aucklanders should regret this, and add that at least the consolidation did not take place in Australian.

Auckland’s vital role in New Zealand’s is in its response to globalisation. Now unfortunately New Zealand does not have a globalisation strategy, and as far as I know there is currently no systematic attempt to develop one. Suppose we did. It would include the standard elements which make a rich country competitive in the rest of the world: a favourable business climate, a highly educated and trained adaptable work force, good infrastructure, a technologically innovative environment, a competitive cost structure, quality macroeconomic management and so on. How would the particularities of the city of Auckland fit into the overall strategy?

Because Auckland is New Zealand’s largest city, it offers potential businesses the opportunity in scale and specialisation which is not generally elsewhere available in New Zealand. There are jobs that Auckland has to attract, because if it does not they will leave the country altogether. So more than any other New Zealand city, Auckland has to see its immediate growth prospects dependent upon it outclassing Sydney, Melbourne, other Australian cities, and indeed other Pacific and world cities for businesses and jobs. From this perspective, globalisation is a plus, because the falling cost of distance means that Auckland is not disadvantaged by location in the way it was in the past.

So how does Auckland compete? To repeat, there are a lot of national economic conditions which are important, but let us focus on the local issues. Can Auckland offer a better deal to internationally footloose businesses in terms of lower congestion, a better environment, and less social decay than the alternatives – is the Auckland lifestyle competitive with other cities of the Pacific and the world?

Obviously the city cannot offer every sort of lifestyle. Larger cities may be able to offer more, but usually at the cost of greater congestion and pollution. But Auckland does not want to win every possible business that might contemplate coming here, just enough to keep it, and New Zealand, prosperous. Thus it needs to evolve a distinctive life style – or rather, to develop its already distinctive lifestyle – to attract jobs. That includes controlling congestion and pollution, ensuring there is a quality infrastructure, and improving the natural and social and cultural and recreational environment. Very often that means spending public money. Providing that is done wisely (and the funding is efficient) that will not deter international businesses. They are much more likely to be deterred by traffic jams, the dangers of social instability and a cultural desert.

The implication then, is there is a place in this world for cities which spend public money eliminating public bads and enhancing public goods. Auckland is one such city. If it does not, going down the alternative path of public squalor in a privatised world, there is little prospect hope for it, or for New Zealand.

So while globalisation may be seen as a threat to Auckland and the rest of the country, the falling costs of distance also creates opportunities. Auckland (and New Zealand) has limitations in a globalised world. But we can turn many of those weaknesses into strengths.

Waltzing with Matilda

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

Listener 15 September, 2002.

Keywords: Globalisation & Trade; Macroeconomics & Money

A hundred years ago, New Zealand turned down the chance to federate with Australia – to become one of its states, rather remain than an independent nation. Ten years earlier there was a groundswell in favour, but the prosperity and the social consolidation of the 1890s gave us the confidence to go it alone. How different it is today. A survey of the New Zealand elite, by Bob Cately, professor of political studies at the University of Otago, found 88 percent believing that New Zealand would benefit from a single economic union with Australia, and 55 percent that economic amalgamation would lead to political union. (His book Waltzing with Matilda describes the elite as parliamentarians, ‘businesses, business organizations, trade unions and some media outlets.’ He does not mention senior public servants but my impression is that they would have responded similarly.)

In contrast to a hundred years ago, the elite is no longer confident about New Zealand and our future. One should not be surprised. For the last two decades it has been pursuing policies which it claims would benefit New Zealand, and the resulting performance has been disastrous. Rather than admitting they failed, they have a new solution which amounts eventually to federation (if the Australians would have us).

Their argument, insofar as there is one, goes something like this. New Zealand is too small and too distant from the rest of the world. They say that is why New Zealand’s international GDP per capita ranking has been falling, and it will continue to fall. The argument is illogical. While it is true that our ranking has fallen – from about 6th in the OECD in 1950 to around 20th today, the decline has not been steady. There was even a longish period (1977-1985) when New Zealand grew slightly faster than the OECD average, although the country was not noticeably larger and closer then, than at other times. Moreover, if it is true that in 1950 we were one of the top rankers, were we larger and economically closer then than we are today?

And even suppose the argument were true. It does not follow we should join with Australia, for they are too far and too distant too. Were New Zealand to amalgamate with Australia we would make up a mere 2 percent of the OECD with the United States and the European Union each 35 percent, and Japan 14 percent. If the theory was correct joining up with Australia would be like jumping from one sinking boat to one sinking only a bit slower. Its logic insofar as it has one, is that Australia and New Zealand should become states of the United States.

Unfortunately the debate is being rigged to suppress alternatives. The elite is so besotted with its view that ‘balanced’ seminar panels on Australian-New Zealand relations consist only of those who support amalgamation, with the disagreement of how fast. Yet there is an alternative argument which goes something like this. It is true that New Zealand is small, and will remain small by international standards. It is also true that New Zealand is distant from the rest of the world, although economic distance is diminishing because of technological change (the consequence of which is globalisation). So a successful New Zealand will have a specialist economy with a structure which reflects its circumstances. Some of these particularities include the resource base of climate and geography which makes us relatively important in some food and fibre (meat, dairy, horticulture, fish and wool and wood). Other opportunities involve tourism, or activities where there are time and seasonal zone advantages (as in our translation service which turns texts around while Europeans sleep). I suspect an important feature is our life style. It may not be everybody’s preference, but it will attract and retain certain sorts of internationally-footloose highly-skilled workers who value it. They will work in businesses where size (economies of scale) are not important, and where costs of international distance are low. (Some computer software development is an example.).

Systematic analysis should be able to identify a portfolio of industries where we have an internationally competitive advantage, and which would generate other employment to service them. But rather than do this sort of exercise, we repeat the mistakes of the past, thinking unsystematically, ignoring evidence and theories which conflicts with our prejudices. No wonder the country is riddled with doubt and defeatism.

To be fair, the elite thinks any federation should not be subject to a referendum. The public is likely to be much less enthusiastic, perhaps because it has more commonsense. But one day there may be a vote which supports the union. Not because that is the best course for New Zealand, but because the elite has blocked off the better courses by limiting debate, and left New Zealand with no other option. TINA, there is no alternative, usually occurs when not only the vision is so narrow that it does not see the alternatives, but when those who say the emperor has no clothes are ignored.

*********
<b.Footnote for Listener 16 January 1999

LET’S PARTY

A recent visit to Sydney left me once more admiring Australian energy and enthusiasm. The city is in chaos as they rebuild the city for the 2000 Olympic Games. The motorway between the airport and city centre is costing $A700m (about five times Transit New Zealand’s annual capital budget). Displays of public commitment abound. I was trying to think of equivalents in New Zealand. Te Papa does not have a strong external image, while Skytower looks anorexically phallic. (Commercialised public monuments almost invariably look tacky.) My list is the sumptuous refurbishment of parliament buildings, some elegant city centre redevelopments, and the Otira viaduct.

It easy to bemoan our far poorer economic performance, for the Australians have handled their economic management far more intelligently. But the public images are Australians have had a faith in themselves, whereas New Zealanders have a subservient colonial cringe, adopting inappropriate policies relevant to a very different economy, because we had no faith in our ability to think for ourselves.

And so we muddle on as the poor cousin, lacking vitality, lacking confidence in ourselves, well illustrated by our inability to do anything well over the millennium celebration. By contrast, the Australians give the general impression that New Zealand could not organize a pissup in a brewery.

The Knowledge Ripple: Where Were the Academics?

This entry was posted in Growth & Innovation, Listener on by .

Listener 1 September, 2001

Keywords: Growth & Innovation

The 1928 National Industrial Conference was the first of a long line of national conferences to address the economic problems of the day. Initiated by Prime Minister Gordon Coates, the 64 delegates included the businessmen, representatives of commercial groups, unionists and civil servants of the day. ….

…No woman attended, no Maori, and no-one from Treasury, for once upon a time that department was peripheral to economic policy. Instead the nation’s five professors of economics gave papers which, together with subsequent discussion and replies, made up over a third of the conference proceedings.

Since then, every three to five years we have had a similar gabfest. This year’s was ‘The Knowledge Wave’. This time there were ‘minorities’ like women, Maori, and Treasury officials. For the first time it was located outside Wellington, in Auckland. But there was no formal contribution by any academic economist from New Zealand (although there were some from overseas).

This poses the local economics profession with a problem. Did the conference organisers think our economists have nothing to contribute to the future of the New Zealand economy? One possibility is that many are not interested in the New Zealand economy, their focuses being the highly abstract economies of economic theory, which have little to do with reality, while others are interested in local problems not addressed in the conference. Perhaps too, some are so associated with Rogernomics, that it was thought impolitic to display them, although this did not prevent invitations to a number of overseas speakers of that ilk. (To be fair one, ex-New Zealander Robert Wade, presented the opposite view.) Perhaps the absence of local academics contributing to the conference (for the only university contributions came from administrators) was intended to signal that our universities are so rundown they have little to contribute to understanding economic growth. That would be ironic because if development depends on a knowledge, the conference’s choice of speakers says a key part of the nation’s infrastructure is unable to create much.

So let me defend the role of academic economists. I am not going to justify their heavy bias towards Rogernomics or irrelevant abstraction. Every profession should have some, although one could argue that New Zealand’s is imbalanced. My point is that economics contains a core lesson, as Keynes reminded us, that practical men and women depend on the theories of defunct economists. That was evident enough at the ‘Knowledge Wave’ conference. As one ‘Herald’ reporter wrote, the conference was ‘an act of faith.’ So was Rogernomics, and the anecdotes and random data that littered the conference inspired articles certainly maintained that tradition of a lack of systematic analysis. Reading the deluge one can only conclude that if New Zealand businesses operated on the same loose thinking, it would no surprise if the economy is doing worse than it is.

Now it is true that economists – academic and non-academic – can be loose thinkers too. That is why the late Professor Bryan Philpott emphasised the need for systematic quantitative estimates and forecasts to be a part of the conference exercise. That does not prevent the optimistic forecasts and contradictions which characterise the political rhetoric on such occasions, but it does mean the thoughtful can see beneath them to the underlying issues. I explored this in a column recently, but since then the Opposition has announced it wants to double wages rates in ten years. Systematic analysis would show the most likely (perhaps the only) way this can be done is by a rate of inflation of above 5 percent per annum. I am not saying National promises to be the party of inflation, but simply that far too many politicians are into rhetoric rather than analysis.

Now rhetoric has a feel-good factor, so many people came away from the conference feeling good. (Those who had not been invited seemed to be more sceptical: South Islanders talked about the ‘knowledge ripple’.) The central conclusion was that New Zealand has to focus on knowledge for economic and social prosperity. That may be a long way from the Rogernome’s prescription, but Philpott’s modelling identified the need a quarter of a century ago – and it did so quantitatively. (The modelling’s other main finding, that the health of the external sector is vital for the health economy may well be the topic of the next gabfest – perhaps under a title like ‘transforming the economy’.)

Philpott might take a little satisfaction of now being a defunct economist, except he moved on in the twenty-five years. Perhaps in another quarter of a century the gabfesters will have caught up to him. I have no doubt he would have been impatient with their current conclusions, especially over their lack of systematic analytic thinking that a quantitative model generates.

There are at least three university chairs of economics coming up in the near future. Let us hope that in one case there will be an appointment who could contribute to the next national conference on the economy – albeit it would still be at a fifth of the rate of 73 years ago.

New Zealand in a Globalised World

This entry was posted in Globalisation & Trade, History of Ideas, Methodology, Philosophy on by .

Presentation to the Wellington Labour Party Conference on Globalisation 1 September, 2001.

Keywords Globalisation & Trade; History of Ideas, Methodology & Philosophy

I begin by affirming the central tenet of any realistic and fundamental analysis of New Zealand: The dominant single feature of New Zealand over the last two centuries has been its ongoing engagement with the rest of the world. Unless one understands that principle, New Zealand’s history makes no sense. Unless one uses the principle one cannot think realistically about the future, nor meet its challenge. Isolationist strategies are bound to fail. There have been isolationists of the Left, who have tried to isolate New Zealand from the world by a self-sufficient economy. But like the rest of us, their ideas came from overseas, they used imports unobtainable in New Zealand, and they travel overseas. There have also been isolationists of the right, the most recent of whom were the Rogernomes, who thought they could ignore the external sector, and by fiddling the financial sector gain us prosperity. They failed.

The Labour Party has always been engaged with the rest of the world. Not only in international relations and human rights; not only in its engagement with the ideas from the rest of the world; and even when it was supporting industrial protection that support came out of an analysis which reflected an account of New Zealand=s trading relationship with the rest of the world. The foundation New Zealand Left-wing thinker is John Ballance, who was premier from 1890 to 1893 before his promise was tragically cut off by an early death. His theme was ‘self-reliance’. It was not an isolationist vision, but that New Zealand had to move away from a colonial status to that of a nation. It is the self-reliance of adulthood, rather than the dependence of childhood. Adults engage with the rest of their world, they communicate, they trade, they specialise, their prosperity depends on others, and yet they are self-reliant.

The fashionable term used to summarise trends in the current world economy is ‘globalisation’. Unfortunately it has a myriad of definitions – including ‘international capitalism’, ‘American imperialism’ – or it is defined by particular activities – international capital movements, foreign investment, free trade – or particular supranational institutions B IMF, the World Bank, WTO … A more analytic approach uses a definition such as globalisation is the consequence of decreases in the costs of distance.

The reduction in the costs of distance applies to faster and cheaper transport of goods. Some German car manufacturers keep their main inventories for replacement near Frankfurt because they can distribute by airfreight to most of the rest of the world within 24 hours. Containerisation and more efficient shipping has reduced the cost of transport by sea. It takes just over a day to fly to London, costing about $2000 return. Forty 35 years ago, it took more than two days, and cost much the same, except the purchasing power of money has markedly reduced since. Costs of transferring information have also reduced. Today, one can read many foreign newspapers on your New Zealand computer before they are read by the waking inhabitants in the cities in which they are published. Ideas, fashions, and jokes flit around the world. If once distance was very expensive and cumbersome, today it is considerably cheaper for many sorts of personal travel, goods, and information.

The consequential changes are both beneficial and detrimental. They include the economic, the social, the political, the cultural and of course the spatial. Thus foreign investment and supranational institutions are a response to an underlying phenomenon which is primarily technologically driven. So New Zealanders need not be disheartened. We say we are distant from the rest of the world. In fact we are closer today than at any time in the past. The problem New Zealand faces is not distance.

Unfortunately, the costs of distances decrease for different kinds of distance. The globalisation problem can be thought to arise from this unevenness. It now takes microseconds for information to race around the world, but days for a person to travel the same distance to Europe, albeit considerably less than the months when my ancestors came here. Shipping there is in the order of weeks, but not months, while my heart will never leave its turangawaewae. I’ll develop the issue of unevenness shortly, but another strength of the definition is that it recognises that at other times globalisation has also been important.

The period from about 1850 to 1914 is recognised by many scholars as the greatest era of globalisation, at least among European nations. Keynes recalled its fruits: ‘The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth. … He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages. … He could secure … cheap and comfortable means of transit to any country or climate without passport or other formality.’ The shifts that we associate with today=s globalisation are not new.

Nineteenth century globalisation was caused by technological changes (and Pax Britannia). The arbitrage that telegraph and transport facilitated brought prices of commodities closer together. Telegraph enabled dealers to identify price differences; railways reduced the cost of moving them between the towns.

Refrigeration, with steamships and telegraph, enabled New Zealanders to produce meat and dairy products and to sell them in Britain 12,000 miles away. British migrants could continue to do much the same things as they did in Britain, but use a superior climate and better land laws to produce more efficiently. If that reduction in the cost of distance had not occurred New Zealand would be a much smaller, and a more impoverished, society.

The migration from Britain had benefits for those Left at home. Because there were fewer workers, their wages rose. They got cheaper food and a larger share of the nation’s production. Slums were less overcrowded. But globalisation had its downside. British hill farmers, their farm prices undercut by New Zealand supply, had their livelihood diminished.

During the 19th century economic activity shifted from agriculture to manufacturing, for it was also a period of industrialisation. Manufacturing processes, once performed at home, moved to increasingly larger factories, as the falling costs of distance made possible the reaping of economies of scale. Our ancestors moved from their villages into the vast slums of Britain and Europe. There was an extraordinary destruction of the environment, polluted air and water, billowing smoke stacks, ‘dark satanic mills’. Economic historians still debate whether living standards rose or fell over the nineteenth century. They probably rose for some, fell for others. Deteriorating conditions caused many to travel from their homes to the other side of the world. The process of industrialisation led to much personal trauma and environmental damage, even if their descendants of today benefited.

Over time mankind learned to harness the new technologies by the creation of regulating social institutions. Factory Acts preventing the use of child labour, regulations, Public infrastructure dealt with the disposal of waste and public hygiene (as well as reduced the costs of distance). Public income protection and support developed. Workers’ compensation started in Germany as a response to factory accidents: it was copied in New Zealand in 1901. So gradually – step by step – the capitalist tiger unleashed by nineteenth century technological change was tamed. Mankind learned to control the forces and make them work in our interests.

At an early stage of nineteenth century globalisation and industrialisation, a major dispute took place within the Left. On one side was the French anarchist, Pierre-Joseph Proudhon. Appalled by the human costs of the changes, he argued for a reversion to the way of life which preceded these changes, with a nostalgia for an Arcadia which never existed, but he hoped to recreate. Another version of the Arcadian nostalgia was in some of the reasons people came to New Zealand and similar settlements. They thought to escape the trauma of European industrialisation by coming to a green and pleasant land, and starting afresh to create a utopia (not, one adds, always sensitive to the indigenous people already there).

The best-known opposition to Proudhon came from Karl Marx, a man we often see through the perspective of his twentieth century followers, many of whom misrepresent him. He argued that industrialisation and globalisation were essentially progressive forces. The processes, he said, was unstoppable, even though they caused misery to the worker caught up in the transformation to the new economy. But, Marx went on to argue, ultimately the outcome would benefit workers with the creation of a communist state, in which they would enjoy the fruits of their labour.

With hindsight we can see that Marx was broadly correct. Sure, we have not reached any communist state – Marx himself was a bit vague about what he meant by the notion. But ultimately the workers of the world are better off. Had they retreated to the nostalgia of Arcadia, they would not be, for they would be isolated from the benefits of the technology which drove globalisation and industrialisation. Admittedly there has not been much equity in the sharing of the fruits of the transformation. Among those who have benefited least were those in the continents of Africa and Asia. Nineteenth century globalisation only really applied to those of European origin. (Interestingly some of the main beneficiaries of late twentieth century globalisation have been East Asians.)

Yet no matter how awful some of the effects of nineteenth century industrialisation were, our ancestor, informed incidentally more by democratic socialism than the ideas of Marx or Proudhon, learned to control it and to benefit from it. That is the challenge and the prospect for this bout of globalisation too, to harness the forces of globalisation, not to deny them. So we need to understand the implications of the uneven reductions in the costs of distance.

Consider the Taranaki. Once the region was covered with dairy factories. Initially it was costly to ship milk any great distance so the dairy farmer took the cream to a nearby factory. As the roading network improved, and tankers became bigger, the costs of distance became less important. Fewer factories were needed. Today, throughout the Taranaki there are towns whose location only makes sense only in that once they existed to service the now defunct local dairy factory, which if still there, it is abandoned or used for something else – perhaps by an antique dealer.

What happened to the towns when the dairy factories closed? For most workers the new factory was still close, and the additional travel time to work not large, so the effects of redeployment were not great either. The redeployed would still tend to use their local shops, so at worst the town would contract only slowly. Hence the factory closure would not usually cause an abrupt disruption to workers and residents. People could cope with this regionalisation.

If lower costs of distance in a region caused some disruption, what about when the costs of distance change the balance between regions? Consider breweries. When the costs of transport were high every town of significance had one. Over time they became concentrated into a single factory in each region. But the process did not stop there.

There used to be a brewery in Thorndon. Today it is the site of a supermarket which sells beer brewed in Hastings. Modern roads, modern tankers, and economies of scale in the production process mean that it is cheaper to manufacture the product there. But what of the brewery worker? Unlike the Taranaki dairy worker who could commute to work a short distance away, the relocation of the brewery meant workers had to change locations or change jobs, Some may have wanted to transfer to Hastings, and some may have done so reluctantly and be pleased in retrospect. But generally many workers were initially worse off from a local business closure and relocation.

Yet the nation as a whole may not be. More workers in Hastings get jobs, Hastings has more economic activity, and the tax the brewery and its workers pay still goes to the national exchequer. Consumers may be better off too, if the beer is cheaper. These gains offset (to some extent) the disadvantages to the individual worker and family. If the redundant worker can be redeployed locally reasonably easily, the nation may be well pleased with the relocation of the business.

(To mention briefly small breweries. ‘Boutique’ suppliers arise where the economies of scale are not overwhelming and where there may be a demand for nonstandard products – fashionware is an obvious example. Moreover, boutique producers may also benefit from lower transport costs if their few consumers are widely scattered. That ‘boutiques’ exist reminds us that economies of scale need not be decisive, which has an important implication for New Zealand’s development strategy.)

Now to move from the regional and the national to the international. Suppose lowering costs of trans-Tasman distance meant the Hastings brewery closed and the company concentrates its brewing in, say, Sydney. The impact on the brewery workers – and the nation – would be more severe than the shift from Wellington to Hastings. It is much harder for the worker to move to Australia, and this time the fiscal revenue moves offshore too. The niggling problems we saw with the impact on a region or a nation, become serious when a business moves offshore.

Note however, these shifts need not be all in the same direction. New Zealand increasingly supplies milk products to Australia, so the Hastings brewery worker may find a job in a Taranaki dairy factory. Of course there will be disruptions, but they need not be disastrous if new industries are creating as many jobs in the nation as the old ones are destroying.

Some sort of economic change is inevitable if we want take advantage of new technologies and industries to create higher standards of living and wider choices. We tend to look at business closures, and not see them as related to the business openings. We tend to assume that our location – wherever we live – will suffer from globalisation and all the benefits are elsewhere. That cannot be true for the whole world. And it was not true for New Zealand in the nineteenth century, for it was one of the major beneficiaries of the reduction of the costs of distance from telegraph, steamships and refrigeration.

Is today’s globalisation different from the past? No and yes. No, because there are similarities. It is not even clear that this time the process is faster or more pervasive than occurred in the nineteenth century, or involves more fundamental technological changes. But yes, because this time globalisation involves more of the world B the nineteenth century globalisation was largely confined to those of European descent and their colonies – and it probably involves less migration.

It also involves more industries. We divide economic activity into the three divisions: primary industries; manufacturing industries; and service industries. Why the distinction? Primary industries are characterised by being close to the key resources they use. Manufacturers can choose whether to be near the resources they use or to their customers, and their location is a question of balancing those costs, while reaping any economies of scale in the production process. Service industries have been traditionally characterised by their being located close to their customers.

Today, they may no longer need to be. In some cases – tourism and tertiary education and medicine for instance – customers can travel to the provider. The telephone line means others can provide services far from the client. When I book an air ticket, the call centre might be anywhere in New Zealand, or even overseas. Books can be bought from a retailing outlet offshore via the world wide web, so even some retailing can be footloose B globalised. As unsettling as these changes are, they may be no more so than when in the nineteenth century when factories – such as a brewery or dairy factory – that had been local since time immemorial, moved away.

So like the transformation which took place in the nineteenth century, we are once more experiencing technologically driven forces which are transforming out way of life B where we produce, where we consume, where we live. Again people are going to suffer. Again we have the choice of a nostalgic attempt to reverse the untamed forces or we can make a vigorous effort to harness them for the common interest. Our ancestors of two centuries ago took up the progressive challenge. It will not be easy to repeat their courage. Marx, the Methodist socialists and all, made many mistakes. Notions which seemed unambiguous change their meaning. Verities which seemed eternal prove to be temporal. Policies which succeeded in the past, will fail in the future. How then are we to grapple with this bout of globalisation?

There are many issues, but I suspect the key ones are the question of sovereignty, and the meaning of nationhood. The notion of national sovereignty is of course being undermined from within, by the rise of nations within nations – in our case the rise of some sort of Maori nation. That belongs to another seminar but, as far as I can judge, that issue is quite different from the pressures that the forces of globalisation are placing on states.

There is a view that globalisation will destroy national sovereignty. But there cannot be total destruction. International business needs laws, and those laws occupy territories. The London Economist of 17 August 2001, almost completely reversed its position on the existence of cyberspace, when it argued that the world wide web will remain subject to national laws. While cyberspace may seem to be ethereal, it requires geographically located servers, land lines and physical points of entry. Globalisation may make policing more difficult but, as best we understand it, it does not undermine the very notion of a sovereign state having laws which it enforces.

It is true that states may find their ability to act limited by the existence of supranational laws. Again this is a complicated area. Some of these ‘laws’ seem to be concocted by the greatest imperial power – currently the United States – pursuing its own interests. But that has past parallels with, say, the Nuremberg trial, and the British gunboat – a law unto itself. The more serious problem, particularly in economic policy, is supranational agreements to which countries more or less voluntarily sign up on. The Left has had little difficulty seeing this applying to human rights – consider the way in which it insisted on intervening in the sovereignty of South Africa under apartheid – so let me take an economic specific case.

The handout elaborates the case for some sort of Multilateral Agreement on Investment. (See Metal, May 2001, p.14-15.) It argues the issue was not whether there should be an MAI, but what should be its contents. If we are going to trade overseas we are going to be involved with foreign investors – despite my favouring Ballance’s self-reliance which suggests we should save more and invest more here.* They need assurances of a stable policy environment if they are going to invest here, and an international agreement as to what the terms of that environment is means of giving those assurances.

One could argue that we go voluntarily into signing up to any agreement and can opt out later if we wish. Thus, de jure sovereignty is not compromised. But often we will have little choice but to sign up to an international agreement which is in some ways unsatisfactory to New Zealand, because staying out would have been the worse option. The MAI would have been an example if it had proceeded. (Fortunately, everyone else decided it was unsatisfactory too.)

The MAI debate in New Zealand exposed the uncritical way the previous government and its advisers considered the issue. They seemed to think that once the agreement was on the table there was nothing we could do except sign up. I have no sense that they were actively lobbying with like-minded countries to get favourable amendments, or that deep consideration was given to our signing subject to strong caveats. Perhaps I am wrong, and like the swan gracefully drifting towards the weir, there was a lot of paddling going on out of sight of the public. Perhaps the real issue was there was no public debate, so that public resistance centred around nostalgia rather than progressive realism.

Once there is an economic engagement with the rest of the world – trade, investment – a country necessarily loses some sovereignty, and a small country loses more than a large one. Economic engagement is like marriage. One gets into it because there are mutual benefits for both partners, but each partner has to give up some freedoms to reap the benefits. Focusing on the international agreements and the international institutions, and their threat to New Zealand sovereignty, ignores the fundamental issue is the economic engagement. Treaties are consequences of international engagement, not limitations in their own right.

The only solution to avoid loss of sovereignty from economic engagement is total insulation – no trade, no investment, no travel. But the alternative is not the other extreme – known as ‘trading naked’ analogous to taking all ones clothes of at a picnic, in the expectation everyone else will follow suit (or non-suit). When we followed this strategy in the 1980s and 1990s, everyone else looked at us – and put on another jersey. We have choices about how we engage with the world. That may not include all the options we would like – nostalgia is not an option – but some are more attractive than others. Let me try to set down the sort of strategy which might be available and which would not be unattractive to many New Zealanders.

At its heart is the notion of New Zealand as a nation. Because New Zealand’s de facto sovereignty is limited, and will be further limited, by ongoing globalisation, we are going to have to evolve a notion of nationhood somewhat different from the idealised sovereign state that we have. Although a nation will desire to have some control over its destiny, its state will not have full sovereignty. Because for most of its existence New Zealand has been a colony or neo-colony that is going to be easier for us to think through than, say, for Britain. My guess is that the core of future nationhood is some notion of common identity embedded in a functioning society, with a dynamic culture which symbolises and enhances the identity and society. I am reasonably sure we are going to have to separate the notion of nationhood from that of the state.

The approach must recognise that supranational institutions arising out of globalisation are an inevitable limitation on national sovereignty, but sees their potentiality to harness the dynamic, but often destructive forces, of unbridled capitalism. A central tenant of our foreign policy will be to move the institutions towards controlling the excesses while maintaining the benefits of globalisation.

A crucial principle could be ‘subsidiarity’ – a German and now European Union, notion that activities should always take place at the lowest possible political level that it is efficient to do so. It is with pleasure I see the notion sneaking into the relationship between central and local government in the latest local government discussion document. If we do not practice subsidiarity at home, we can hardly argue for it abroad, to restrain others who want to impose on us.

I have not time to detail the internal policies which might flow from such a strategy, although you will find I have canvassed many of them – economic, cultural, social political B in my other writings, including my next book The Nationbuilders. Economically it seems likely that a successful New Zealand will have a specialist economy with a structure which reflects its circumstances. Some of these particularities include the resource base of climate and geography which makes us relatively important suppliers of some food and fibre, and offer the opportunity of further processing and related products. Other opportunities involve tourism, or activities where there are seasonal and time zone advantages (as in our translation service which turns texts around while Europeans sleep). I suspect an important competitive advantage is our life style. It may not be everybody’s preference, but it will attract and retain certain sorts of internationally-footloose highly-skilled workers who value it. They will work in businesses where size (economies of scale) are not important, and where costs of international distance are low. (Some computer software development is an example.).

Rather than elaborate this strategy here, I want to end on a more sombre note, although there is an upbeat. Today the New Zealand elite is riddled by self-doubt and defeatism. Perhaps one should not be surprised given the way they have mismanaged New Zealand over the last two decades. You will not be surprised to learn a survey of the elite, administered by Bob Cately of Otago University, found they saw our destiny down a path which will ultimately lead to New Zealand joining Australian in a full political union B in effect New Zealand becoming a state in the Australian federation. Some 88 percent believed that New Zealand would benefit from a single economic union with Australia, and 55 percent that economic amalgamation would lead to political union.

Ordinary New Zealanders may not be so despairing of our future. What they have, against the elite, is the weapon of MMP. Parliament has probably never been so sensitive to the public, and if New Zealanders are not as defeatist as the elite, our politicians are going to have to provide a creative leadership for nationbuilding and a positive response to globalisation. Our likelihood of success is fortified by that our Left wing ancestors took up the challenge, and triumphed over the nineteenth century equivalent.

* In the discussion which followed, I was asked to elaborate this proposition. If we trade our foreign customers and suppliers will often want some vertical integration, which means their owning parts of the New Zealand supplying processes. Moreover, access to advanced foreign technologies will often require accompanying foreign direct investment. However we have also had foreign investment in New Zealand, simply because the nation does not save enough and has had to borrow to cover its excess expenditure. John Ballance would have considered this sort of borrowing to be evidence of a lack of self-reliance.

The Wisdom and Wit Of John Maynard Keynes

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

Keywords: History of Ideas, Methodology & Philosophy;

The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.

The ideas of economists and politicians, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical
men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist, Madmen in authority, who hear voices in the air, are distilling
their frenzy from some academic scribbler of a few years back. I am sure the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current
events are not likely to be the newest. But, soon or later, it is ideas, not vested interests, which are dangerous for good or evil.

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again.

The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty.

Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but in itself it is in many ways extremely objectionable. Lenin is said to have declared that the best way to destroy the capitalist system debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily.

We must aim at separating those services which are technically social from those which are technically individual. …… The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all.

I should say that what we want is not no planning, or even less planning, indeed I should say we certainly want more. But the planning should take place in a community in which as many people as possible, both leaders and followers, wholly share [Fredrich Hayeks’] moral position. Moderate planning will be safe enough if those carrying it out are rightly oriented in their own minds and heart to the moral issues. This is in fact already true of some of them. But the curse is that there is also an important section who could be said to want planning not in order to enjoy its fruits, but because they hold ideas exactly the opposite of [his], and wish to serve not God but
the devil.

Regarded as a means the businessman is tolerable: regarded as an end he is not so satisfactory.

Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be: and this national weakness finds its nemesis in the stock market. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable.

The social objective of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future.

I believe that there is social and psychological justification for significant inequalities of income and wealth, but not for such large disparities that exist today.

It is better that a man should tyrannize over his bank balance than over his fellow-citizens.

I do not know which makes a man more conservative –– to know nothing but the present, or nothing but the past. I believe myself to be writing a book [The General Theory of Employment Interest and Money] which will largely revolutionise –– not, I suppose, at once but in the course of the next ten years –– the way the world thinks about economic problems.

Markets can remain irrational longer than you can remain solvent.

When the facts change, I change my mind. What do you do, sir?

Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.

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Some additional gems

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

Something Rotten: The Ship Of State Keeps Striking Leaks.

This entry was posted in Governance, Listener on by .

Listener 18 August, 2001.

Keywords: Governance

A recent Treasury working paper Review of Evidence on Broad Outcome of Public Sector Management Regime reveals that despite the upheaval in the public sector of the last twelve years, there has been surprisingly little evaluation of the changes, and the little of which there is has not been of very high quality. Even more striking is the almost complete absence of the public’s perceptive in the evaluations. The assumption is that no-one was worse off as a result of the changes, although every ordinary member of the public has tales to the contrary. The official studies implicitly reflect an arrogant antipathy to New Zealanders, as if the state sector is only for the state servants and their political masters, and the public are just an irrelevant nuisance.

If the state sector is not systematically monitoring its interfacing with the public, then the task is left to others, most notably the parliamentary opposition. What a feast Labour had in its last year of opposition, with new revelations virtually every week. It is different being in government. One can give instructions to address this or that anomaly. But the imperial command is not always sufficient, and is only retrospective. The government is getting tarnished by public sector failure in the same way that Labour damaged National when it was in government.

Thus the tangle over Christine Rankine. Far too much attention has been about her dress. It is a matter of practice in, say, the National Orchestra for its women players to have more freedom of dress than the men. But the rule is no player may upstage the conductor, the soloist excepted. Similarly a chief executive does not upstage her or his minister. One of the illuminating contrasts in the court case, was between Margaret Bazley who, having headed a number of government departments, understood the unspoken rules and Rankin, who seems not to have.

Historically the public service has functioned on a bewildering set of informal understandings, which public servants learned by experience. Attempts to codify them never worked, but commonsense usually sufficed. In the late 1980s the previous Labour Government tried to put them onto a more legalistic contractual basis, as a part of its state sector reforms. But the statute does not say ‘CEOs should not upstage their minister’. Nor does the employment contract say ‘dont wear distracting things like bo-jangles or kaftans’. And neither says ‘you are the servant of the public’. Should they have to?

The Rankin episode is one of an extraordinary, and extraordinarily long, list of failures. Among the worst of which have been the Cave Creek disaster and the incarceration of an auditor-general for fraud. The ship of state keeps striking leaks. As they rush to caulk the last leak, no-one seems to ask whether the vessel is seaworthy. What event would be necessary for those on the upper decks to contemplate the possibility that their reforms are fundamentally flawed – that the leaks are not accidents, but show the ship unseaworthy?

A key weakness has been their over-reliance on the excellence of chief executives of government departments. The court cases involving Rankin and the fraudulent auditor-general must surely raise doubts that sometimes the system appoints flawed men and women – like you and me – rather than the super-beings the theory assumes. Rankin’s managerial weaknesses were evident shortly after her appointment, and yet the system could do nothing for three years other than counsel her – not very effectively, apparently. (To let you into a secret, there is a widespread belief among insiders that there have been other inept managers which the system could do little about, except not renew their contracts.)

The authority of the head of a government department is at the heart of the 1988 State Sector Act. If that is problematic, the underpinning structure has to be too. Why do politicians who find themselves soaked in the leaking ship not give it a thorough overhaul? Some of the senior ones approved the original reforms, while which chief executive is going to say that there is something wrong with the system which has given them power? Too predictably, there will be further breakdowns – many minor, some major. Do not ask me what they will be. If most of the ship’s planking is rotten it is impossible to tell where the next leak will be.

What is predictable is that in the next year or two a frustrated government will announce it is time to improve the way the state sector treats the public. As these things usually happen the ministers will not have much of an idea what can be done. The likelihood is the officials will come up with a package which on the ‘duck test’ is commercialisation: privatisation; user charging; outsourcing, shifting costs and risk to the public. That is the only thing the officials seem to know, and is the underlying assumption in the State Sector Act which determines how they behave. I am not sure what happens after that.

I would start by renaming the State Sector, ‘The Public Service’.

Global Players: The Secret Of Some New Zealand Businesses’ Success.

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

Listener 4 August 2001

Keywords Business & Finance; Growth & Innovation

Despite being used as a text book in some business schools in the 1990s, Theory K: The Key to Excellence in New Zealand Management was always a bit of a joke, for the crash of October 1987 put an end to some of its best examples of ‘excellent’ New Zealand businesses. The book devotes most space to Equiticorp (although a number of other did-not-survives were also praised). One is left wondering how a firm founded only two years before the book was published could be given such prominence. (You will find part of the answer in Ollie Newman’s “Lost Property”, which explains how public relations had a key role in gulling the investor public. )

A rather different sort of book – compensating for a lack of slick slogans by solid research – is World Famous in New Zealand: How New Zealand’s Leading Firms Became World Class Competitors. It is written by Colin Campbell-Hunt, who is shortly to take up a chair in Management at the University of Otago, and six other academics (John Brocklseby, Sylvia Chetty, Lawrence Corbett, Sally Davenport, Deborah Jones and Pat Walsh) as a part of the ‘Competitive Advantage New Zealand’ (CANZ) project. (They have also contributed to three NZIER reports including the just published Global Player?.)

The team’s approach was to investigate ten New Zealand businesses which each had at least a decade of creditable performance: Criterion Furniture; Formway Furniture; Gallaghers (electric fencing); Kiwi Dairies; Montana Wines; Nuplex (chemicals); PEC (point of sale systems); Scott (engineering products); Svedela Barmac (quarrying equipment); Tait Electronics. While the description of their products is simplified here, each is well focussed on a few, and the focus is on producing and selling things, not on finance. Only Gallaghers is among the 50 odd companies the Theory K team looked at, although with more resources the CANZ team might have been interested in some of the other firms among the (probably less than) half that were still in existence fifteen years later.

The team found no simple formula for success. Instead, each firm had a broad set of resources, attributes and strategies, which they managed in a balanced way. As it happens, each was in the export sector but even here were two development strategies: becoming global leaders or becoming regional leaders. Among the foundations of competitive advantage the book identifies are networks of business relationships and internal relationships; quality reputation; innovation; organisational learning and decision processes; multiple technologies; production capabilities; and organizational culture. There is not much a top firm can afford to get wrong. (Another crucial element is luck. Some good firms went to oblivion without it.)

You will have to read the book to get the flavour of the complexity – to see which management style and strategy suits you or the firm you work for or want to invest in. Others will read the book for the pleasure of observing successful New Zealand businesses, without being overwhelmed with the PR hype.

There are some broader lessons. Here are New Zealand firms that have proven they can succeed in a tough international environment. They did so by designing good products and services, producing them at competitive prices and in high quality, and marketing and distributing them vigorously and intelligently. They are not big firms by international standards, and typically there is some local peculiarity which enhances their probability of success. (Although I was disappointed that there were no fishing, forestry and horticulture equipment business examples. These are sectors where we ought also to have an underlying advantage.) In some cases it is simply an outstanding leader who loves living here.

Did government policy matter? The book sets out the case for and against, but it accepts the sample is too small. Because it only looks at successes, it cannot comment on promising firms that were destroyed by government measures. Or by financial takeovers. Allflex (livestock eartags) was not in the study. Two decades ago it was coupled with Gallagher Holdings as having the excellent promise of leading edge technology businesses in niche international markets. But privately owned Gallaghers missed the Theory K speculation, and got on with the job of developing, producing and distributing world leading electric fences. Meanwhile, Allflex was bought and sold by financial companies, each paying higher prices and disrupting the firm’s management while stripping it of financial flow. (Wine drinkers must be a bit worried about the future of their montanas.)

Twenty years ago I wrote (in Listener columns such as that of 1 September 1979) that if we were to give even half the attention to farming and manufacturing that we have been giving to the large scale capital intensive projects, then we could double our confidence in the future, and that we needed to find small businesses and give them the support they need to make a dent in our economic problems. Instead we went for financial mysticism with even more disastrous consequences than ‘think big’. Even more sadly, too many of our business school students were trained in that thinking. Hopefully the CANZ book will lead to more managers who focus on the fundamentals rather than formulaic cliches.

International Guidelines for Estimating the Costs Of Substance Abuse: (2 Ed)

This entry was posted in Health on by .

Report prepared for the Canadian Centre for Substance Abuse by Eric Single (coordinator–Canada), David Collins (Australia), Brian Easton (New Zealand), Henrick Harwood (United States), Helen Lapsley (Australia), Pierre Kopp (France) and Ernesto Wilson (Colombia).

This report was published by the World Health Organisation in September 2003.

Keywords: Health Economics

This revised edition of these guidelines represent modifications and additions to the first edition of the International Guidelines on Estimating the Social and Economic Costs of Substance Abuse, based on discussions held at the Third International Symposium on Estimating the Economic and Social Costs of Substance Abuse, held in Banff, Alberta, Canada, in 2000.

Executive Summary

The use of alcohol, tobacco, pharmaceuticals and illicit drugs involves a wide variety of adverse health and social consequences. There is a strong need for improved estimates of the economic costs of substance abuse. Cost estimates help to prioritize substance abuse issues, provide useful information for targeting programming, and identify information gaps. The development of improved cost estimates also offers the potential to develop more complete cost-benefit analyses of policies and programmes aimed at reducing the harm associated with the use of psychoactive substances.

This document presents a general framework for the development of cost estimates. Studies of the economic costs of substance abuse are described as a type of cost-of-illness study in which the impact of substance abuse on the material welfare of a society is estimated by examining the social costs of treatment, prevention, research, law enforcement and lost productivity plus some measure of the quality of life years lost, relative to a counterfactual scenario in which there is no substance abuse. A matrix of the types of costs to be considered is presented, and there is a detailed discussion of the theoretical issues involved, including: the definition of abuse, determination of causality, comparison of the demographic and human capital approaches to cost estimation, the treatment and measurement of addictive consumption, the treatment of private costs, the measurement of intangible costs, the treatment of non-workforce mortality and morbidity, the treatment of research, education, law enforcement costs, the estimation of avoidable costs and budgetary impact of substance abuse.

Special considerations are discussed with regard to developing economies and drug-producing countries. The guidelines conclude with a brief discussion of future directions, with particular attention to the expansion of economic cost studies to developing countries, and the implications of these guidelines to research agendas and data collection systems.

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The full guidelines are available at International Guidelines for Estimating the Costs of Substance Abuse: Second Edition, 2001

Remaking New Zealand and Australian Economic Policy by Shaun Goldfinch

This entry was posted in History of Ideas, Methodology, Philosophy, Political Economy & History on by .

New Zealand Books August 2001, p.8-9.

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

Shaun Goldfinch’s Remaking New Zealand and Australian Policy: Ideas, Institutions, and Policy Communities is the latest version of what is becoming the standard account of the origins, implementation, and outcomes of the economic changes of the 1980s and 1990s. It goes something like this.

In 1984 the New Zealand economy was suffering from a sort of scelrosis in its economic mechanisms, arising from the unwillingness of the Prime Minister and Minister of Finance of the times, Rob Muldoon, to respond to the social and economic changes which New Zealand had experienced in the 1970s, and the tight interlocking of the various pressure groups protecting their interests. The external sector had experienced rapid diversification – greater than any other in the OECD country – which was impacting on the internal organisation of the economy too, as was some technological change (but as not as much as happened in the 1990s from telecommunications). In parallel to the economic change there was an increasing social heterogeneity as various groups which had largely been ignored in the past – such as women, Maori and other ethnic groups – became more prominent and demanding of a proper role in their society.

The ‘rogernomic’ economic polices introduced by the Labour Government which came into power in 1984 were those set down in the Treasury’s 1984 and 1987 Post-election Briefings (rather than, say, the 1984 Labour Party election manifesto – there was not one in 1987). The Treasury (and, where relevant, the Reserve Bank) was enormously influenced by the neoclassical economic paradigm in general (which had been increasingly replacing the institutionalist one since the 1950s), including such developments as public choice theory, law and economics, and transactions analysis (which, in any case, are all mixed up together), and monetarism (rather than Keynesianism) with the rational expectations variant prominent. Typically, the particular application was always at the right wing (say, Chicago School) end of the political spectrum. (It has to be added that any simple statement of the paradigm is necessarily inadequate. There is no totally satisfactory account of its intricacies. Goldfinch’s 13 page account is certainly not).

It is convenient to separate Labour’s policy changes into two phases – roughly before and after the 1987 election, although the second phase was presaged by a private letter from Roger Douglas to David Lange in April 1987. The Business Roundtable did not have a great impact on the first phase, but its public support and pressure were critical in the implementation of the second (which is most remembered for its privatisations, but was much broader, and included major public sector reforms). The OECD and IMF were largely supportive, but had little impact, other than indirect influence on forming the analysis of Treasury officials.

A key element in their implementation by the Minister of Finance, Roger Douglas, and his close associates. Douglas did not come to the broad thrust of these policies until 1983, and then primarily at the prompting of a Treasury official attached to his office while in opposition, and another economist in the Labour Party Research Unit.

The implementation was characterised by two major features. First, politically they were introduced very rapidly – blitzkrieged through – ignoring the spirit of the usual democratic conventions, although usually keeping to their letter. Second, the policies tended to be at the extreme end of the spectrum. (I have pointed out that the two features are interdependent. The rapidity meant that where a policy was flawed, there was no mechanism by which the weaknesses could be identified and addressed.)

A third phase of the reforms began with the election of the National Government in 1990, although the blitzkrieg phase lasted only a short time. The pressures here were from the right of the National Party and the Business Roundtable plus some other lobby groups who had been converted to the policies.

The outcomes of the policies have been marked by no overall improvement in economic performance, except the inflation rate is now slightly below the (comparable) OECD average, rather than markedly above it. The economic growth rate and the growth of productivity slowed down, so the economy has been growing more slowly than the OECD, and further falling behind. There is a view that the sustainable growth rate is currently about the OECD average – which is where it was in the seven years before 1985. Until recently advocates promised the growth record would improve in the near future, but after a decade of promising this claim has been dropped. At the moment New Zealand has a large structural current account deficit on the balance of payments, which is likely to compromise economic performance if there is a major international financial crisis.

Unemployment has risen markedly (especially if there is allowance for depressed levels of labour force participation), and most social groups are much the same as or worse off economically (after adjusting for taxes and benefits and price changes) than they were 15 years ago. (There is a problem here of allowing for quality changes since there have been improvements in some areas and deterioration in others.) The exception is the top income decile (tenth) who are markedly better off (a 25 percent improvement in after-tax real incomes is a common estimate). So income equality has increased largely as a result of the tax and benefit reforms favouring the rich. (There is some evidence that there is increasing inequality of market incomes in the 1990s, but this may be due to globalisation rather than the policy changes.)

Particular beneficiaries, in the short run anyway, of the policies were the corporations who are members of the Business Roundtable. They are mainly from the financial sector which today is politically more powerful than it was in the early 1980s. Producers are correspondingly less powerful. Whether consumers are better or worse off, depends on their spending power. An unexpected consequence of the new policy regime was that the electorate voted for constitutional reform to an MMP electoral regime.

MMP and the failure of the reforms have resulted in a drift back to economic orthodoxy. However the rogernomes used their power to eliminate competition – as Robert Kennedy noted, extremism generates intolerance – so that the development of an alternative policy paradigm is being delayed by rogernomes still being in senior positions of power, and the continued suppression of those who might offer a different approach. Thus policy continues to carry over much of the failed extremist’s approach and – business cycles aside – the economy has not shown a lot of improvement. The danger remains that in a world financial or economic downturn, New Zealand’s economic vulnerability – magnified in the last two decades – will be exposed.

That is a brief summary of the standard academic story. The more comprehensive story can be found in whole or part in books written in the last few years by Alan Bollard and his colleagues, Jonathon Boston and his colleagues, Ellen Dannin, John Gould, Colin James, Bruce Jesson, Jane Kelsey, and by this reviewer, and in numerous scholarly articles with special mention going to Geoff Bertram, Paul Dalziel, Tim Hazledine, Pru Hyman, Hugh Oliver, Bryan Philpott and Joe Wallis.

What does Goldfinch’s book bring to the story? He broadly agrees with the mainstream. His new material is twofold. First, he carries out a comparison between New Zealand and Australia. This story has already been explored in The Great Experiment by Frank Castles, Rolf Gerritsen and Jack Vowles published in 1996. While Goldfinch’s book adds no new major insights to the earlier one, it is valuable in again laying out the two stories side by side – in a hugely insular country where one of the many problems of an institutionally impoverished pluralism in public debate is an absence of comparative insight. Both books conclude that the different political arrangements allowed blitzkriegs in one country but not to the same extent in the other. It seems that the more clumsy Australian processes weeded out more of the incompetent policy, so the Australian economy performed much better than New Zealand’s despite, on some measures, it suffering a more difficult external environment.

The other feature of the book is interviews of 180 ‘leading policymakers’, on both sides of the Tasman. While there are excerpts from them, the main content is a series of tabulations which asked them who had the most influence on various policy initiatives. The reader will increasingly see all the flaws in this method, and eventually discover an appendix which sets them down, although perhaps the author did not recall all his caveats when he was writing up his interviews.

The fundamental questions are what is the meaning of influence, and does the recall of the elite shed much light on the topic? The results are rather odd. Goldfinch asked, for instance, 87 apparently informed New Zealanders ‘Can you name about five or six individuals you think were particularly influential in forming this policy?’ Some 60 percent said Rod Deane (deputy governor of the Reserve Bank at the time), 51 percent said Roger Douglas (Minister of Finance), and 37 percent said Graham Scott (assistant secretary of the Treasury with these responsibilities at the time). They would be on my list too (although Douglas’s role in ‘formulating’ – as distinct from driving – is problematic). The next down has 21 percent support, and there are a further 18 names. We are not getting a lot of agreement as to how the policy was formulated. Nether the head of the Treasury macroeconomic division at the time, nor the chief economist of the Reserve Bank, are mentioned. Some choices are odd: they include Rob Muldoon who was in opposition, and business men who were not yet in the policy loop when the liberalisation happened in 1984. Or consider the four nominations for Rob Cameron, who left Treasury in July 1984, before it happened (and was not in a macro division before then). Does the elite know something that the rest of us do not?

Actually Cameron’s involvement poses an interesting problem. When it comes to privatisation – which does not begin until 1987 – some nine nominate him. I have more sympathy with that decision, but it tells us something about the difficulties of interpreting ‘influence’. Cameron was a key player in Treasury’s Economics II division, and there is pivotal – if impenetrable – paper he presented (with Pat Duignan, mentioned by three) in early 1984 which shaped the way the Treasury thought about state trading activities. Some privatisation would have happened anyway, but arguably the exact form of corporatisation – making the state owned enterprises organised like private corporatisations, and thus easier to privatise – was a consequence of this paper. No doubt that Cameron takes pride in this contribution to the privatisation policy. Similarly, had Deane left the Reserve Bank in July 1984 I would have still said he was one of the handful who had the most influence on the financial liberalisation. So we can see how complicated the notion of ‘influence’.

Unfortunately Goldfinch’s tables contain errors and vagueness. Scott is described as a Deputy-secretary of Treasury. He was an Assistant Secretary and was promoted straight to Secretary. Two union leaders are described as members of the employer’s federation. Officials are described as leaving Treasury in the ‘mid-1980s.’ Cannot one be more precise? Cameron apparently, according to Goldfinch, has not yet left Treasury.

One could see the procedure as a preliminary survey to identify the key players, the scholar using the compiled lists as the basis for a serious investigation, perhaps reinterviewing them and going to the documentary evidence. I have looked at the papers of a number of policy developments – some covered by the book – and one can make a lot of sense of what was going on. A reinterview (or a phone call or chance meeting on ‘The Terrace’ ) can clear up the obscurities. What one finds is that there was a systematic policy development, although sometimes the ideology overlooked difficulties or blocked off options. (For instance, the papers on floating the dollar looked only at the extremes of the fixed peg which was then in existence, and a clean float which was adopted: there are numerous options between.) This does not tell us much about the political implementation issues, but recall that the question was about the ‘formulation’ of policy. Its political management and implementation often involve different people. Perhaps that is why the respondents gave such odd answers.

Goldfinch does not go to the documentary evidence, despite acknowledging that people’s memories are unreliable and they also rewrite history (well illustrated by the interviews in Marcia Russell’s television extravaganza Revolution). He does not even rework the data. Suppose in a preliminary survey four actors are identified by the majority as key to a particular policy development. Those the key players nominate as significant are far more interesting than the nomination of businessmen who were not there and made things up.

There is within the book some quotes from interviews of key players which scholars may use (although one always has to read a statement of any official with an understanding that a decade later many still accept the notion of confidentiality). But sadly the book adds little to the academic’s account: neither does it challenge it.

What the book does is shed light on ‘the network’ of insiders, one of the least studied but most potent elements of the Wellington political scene. These are the group who are either in the core of policy, all who hover around its edges. Goldfinch’s sample was from a ‘snowball’ getting the insiders of the list to nominate others from their network. Some are very powerful and knowledgeable. Others, the book shows, have only the vaguest idea about what was happening, either because of their failing memory (one recalls cross-examinations at the ‘Winebox enquiry’) or because they were not there, or because they simply do not know or understand the policy process. Their political power and prominence comes not from some intellectual excellence or policy competence, but by protecting and promoting one other. They will pretend they know when they dont, and nominate other members of the network on the basis of solidarity rather than actuality. One suspects that from Goldfinch’s raw interviews there is an intriguing story to be developed. It is a pity he did not read his own appendix on method, and think how he could usefully use the material he gathered.

Green Light: How Ireland Went from Bust to Boom.

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

Listener 21 July, 2001.

Keywords Globalisation & Trade; Growth & Innovation

In 1987 the Irish decided that their economy needed a new direction. Rather than policy being seized by a small group of extremists, there was a national consensus for change, including from the parliamentary opposition.

The Irish fiscal position has been conservative, correcting a huge imbalance in the government deficit. Within the totality of public spending the government concentrated on education and industry assistance, some would say to the detriment of the provision of health services and physical infrastructure (roading and energy).

Irish personal income tax rates seem higher than New Zealand’s. It is always hard to make comparisons, but their top rate is 42 percent, compared to our 39 percent. However their corporate tax rates can be as low as 10 percent on some businesses. (Because corporation tax is largely a form of holding tax I favour low rates. But I am told a low rate strategy is impracticable because it offer opportunities for tax avoidance. I did not find out how the Irish prevented this.)

Low corporate taxes are a major reason why foreign businesses were attracted to Ireland. The Irish GDP (which is a measure of production) may be overvalued because of transfer pricing where international corporations price their exports low in high tax countries. Although the Irish have one of the world’s highest GDP per capita, much of the income goes offshore in corporate profits. Their standard of living (what they spend) still seems lower than Britain.

But it is rising, and Irish unemployment rate has fallen from around 17 percent to below 5 percent. Instead of continuing the last two centuries of massive out-migration, Ireland is experiencing an inflow.

The Irish are not antagonist to ‘foreign direct investment’ (FDI). This may be because when the 26 counties gained independence in 1922, the country was riddled with British investment, and they were keen to get it from other sources, especially the United States. The Irish diaspora has been important with its descendants reinvesting in their ancestral hoome. (It is thought that there are about 70m people of Irish descent overseas, say twenty times more than the New Zealand diaspora. Moreover, the Irish roots are far deeper than ours – Maori excepting.)

FDI is when a corporation builds and runs a production unit in a foreign country. The ‘D’ distinguishing from indirect investment which is financial flows which do not generate directly extra productive investment. (Until recently New Zealand seems to have concentrated on financial flows rather than physical investment.) Most of the FDI businesses I saw were supplying products and services to Europe which East Asian businesses supply to the Pacific Rim. I wondered why we did not have some of those businesses.

In may be part a mind set. The Irish roading system is congested: much like ours – even inferior – but with far more traffic (because of inadequate infrastructural investment). But the industrial complex at Shannon in the west hardly needs the 1.2m people in Dublin and 1.5m in Northern Ireland if it is concentrating on supplying 300m in Europe. Our strategy has been much more inward looking.

I got the impression that the Irish may be running an undervalued real exchange rate and that, in particular, their real wages were slightly lower than justified by their international productivity. So they take their higher productivity in extra jobs rather than higher incomes (a view I am sympathetic with, given how damaging unemployment and out-migration are).

The FDI businesses are not, however, low wage businesses. They are attracting Irish back from overseas. They require high skills. An FDI telecommunications equipment factory I visited had 70 percent of its staff who were university or polytechnic graduates.

The Irish have made it cheaper to get an education (rather than the New Zealand strategy of making it dearer). They acknowledged that their young tended to leave the country, but thought they had a right to a decent education even if they left. This ‘entitlement’ approach to education sort of backfired, when the educated young had their OE and returned home, to work in the foreign businesses attracted by the well educated labour force.

Irish industrial policy is moving to giving a greater emphasis on technology and moving up the valuer chain. The Irish think they found a niche in international economic development in the 1990s, but the world has moved on and so must they.

One cannot simply explain the Irish success in terms of their joining the European Union. So did Greece but its economy has not prospered to the same extent. The EU helped, but the policy was crucial.

For 15 years we pursued almost the exact opposite of the Irish industrial strategy. Today the Labour-Alliance government is adopting many of the policies with which the Irish have succeeded, although not on as large a fiscal scale. Moreover, we do not yet have the advisers with the commitment and experience of the Irish I met. Time and again they made (orthodox) economic remarks which would be considered eccentric here. By our standards their analysis and strategy is. But it succeeded while ours failed.