Orthodoxy Rules: OK

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

Cullen, Anderton, English and Bradford Would Make A Great Team

Listener18 December, 1999.

Keywords: Political Economy & History;

Right to the last day before the election, business commentators presented their own self-interest disguised as ideology disguised as analysis, in a vain attempt to affect political outcomes. They symbolised the end of an era: out of touch with the polity, out of touch with the economy, arguing a case that was known to have failed, as if it is impossible to learn from experience.

In fact the new government’s promised economics are mainline, reflecting a policy framework typical of those in the rich world. Even Alliance leader Jim Anderton, now in triumvirate with Helen Clark and Michael Cullen, is far more economically orthodox then he is demonised. (Some of his caucus colleagues are not.) Were a grand coalition of the main parties necessary, Cullen and Anderton with Bill English and Max Bradford would make a great economics team. There would be policy differences of course, but there is a commonality in their economic vision of a market economy with cautious interventions to make it work better. As in the case of the first Liberal government (elected in 1890), the First Labour government (1935), and the Third Labour government (1984), there will be considerable continuity of policy before and after, despite our liking to present each as a break from the past.

English is a Bolger man, on the centre right and enormously influenced by Catholic social teaching. His time as Minister of Health taught him that commercialisation solved little. He learned that if we want a better public health system, we are going to have to spend more on it. He faced up to the tension between higher public spending and lower taxes by trying to build into party policy the principle of a dollar extra for each. English’s youth – he is 38 – means he has still has much to learn and develop. One hopes he gets the chance.

Bradford, older at 57, has a reputation for extremism. He will not repudiate his commitment to the Employment Contracts Act, and some of his early ministerial pronouncements were pro-commercialist. But he came up with orthodox (and interventionist) responses to microeconomic failure in energy and the knowledge economy. He was a Treasury official from 1966 to 1978 (with a stint in Washington), which makes him one of “Henry Lang’s Babies.” Lang, Secretary of the Treasury at the time, was analytic, empirical, and pragmatic. After he retired, Treasury drifted into the excesses of Rogernomics. Bradford has returned to his roots.

National’s English/Bradford vision of economic management got lost in the election. Jenny Shipley had been made prime minister to shift National to the right, from Jim Bolger’s seeking the middle ground. But the rightwards lurch left the centre open to Labour, and through most of 1999 the party’s economic policy, led by English and Bradford, crept back. National abandoned the strategy during the election, and went head on with Act, fighting for the heart of the right, leaving the centre deserted.

Meanwhile, the Labour-Alliance non-aggression pact worked brilliantly. Labour focused on the centre, while Alliance covered the left. Although he died almost a year earlier, Labour Party president Michael Hirshfeld contributed as much as anyone to the centre-left victory when he saw the absolute necessity of some agreement, despite the two parties’ stand-off when he took over.

Carrying over the pact into government will be much harder. Of course there will be personal tensions, but Cullen and Anderton ought to be able to work together. However, Anderton will be pulled towards more radical policies by his caucus, the bulk of whom lie to his economic left. To keep the relationship effective, Labour will have to make concessions (and there is a minority within the Labour caucus who will be happy to do so).

The big challenge will be to get equity considerations into policy in a consistent way. For fifteen years they have been ignored, with an almost exclusive policy focus on efficiency. I still see officials’ papers which are almost totally devoid of any notions of fairness. The new government will want a more thoughtful approach.

The underlying tensions within the new government are no different from those under the single party government, when the leadership was sensitive to democracy. Without that sensitivity – as occurred under Muldoon, the subsequent Labour governments, and the early Bolger government – there was a repression of dissent. That wont work in a multi-party government. The two caucuses will lead to a public debate, which at first may be bewildering to the public, especially if anti-democrats present this as failure, rather than as a part of the consultative process. In time the public may learn that economics is not the clean cut subject leading to pure policy which some commentators propose, especially when they want to present their self interest as the only alternative.

Hopefully, in the post-1999 political environment, the media will lift the bans they placed on some commentators in the early 1990s because they criticized the government’s policies. The result has been a lop-sided presentation of economic orthodoxy, with a widespread misunderstanding of both the economic debate and the incoming government’s policies.

Has New Zealand an Economic History?

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

Paper to the Annual Conference of the New Zealand Historical Association, Hamilton, 7 December 1999.

Keywords: Political Economy & History;

The question of whether New Zealand has an economic history could be thought of as rhetorical, with an obvious answer of yes. But if we take it as a question about the state of current New Zealand historiography – asking whether historians include the economy in the stories which they tell about New Zealand – the answer is less obvious. If we look at many of the accounts of our history, be it the grand overview or a monograph or essay, we find them bereft of any conscious portrayal of the economy interacting with society and having some influence on the path which New Zealand takes. This is a very sweeping statement and there are exceptions – notably some of the work of John Gould, Brad Patterson and Russell Stone. Nevertheless this paper could take some standard histories and illustrate the broad proposition, including suggesting various insights the writers missed because they ignored an economic context.

Now I am not arguing that historians never mention the economy. Depending on the context there may be references to unemployment, business, taxes and debt, prosperity and depression and so on. However what strikes this economist is any references tend to be superficial, rather than an integral part of the account (and of course this judgement is less true for some rather than others). The general impression though, may be likened to there being a set of relevant manuscripts in a foreign language. Some historians ignore them altogether, some acknowledge them, but very few try to translate and read the texts. Thus there is a potentially wonderful resource whose use (and often even acknowledgement) is absent from the core of the discipline

It could be argued that there is insufficient quality economic history for the historian to draw upon. While there is an element of truth in that proposition, well established good quality economic history – such as Colin Simkin’s Instability of a Dependent Economy – is usually ignored. Moreover there is new work being done by economic historians, which does not seem to interest to conventional historians, for there is hardly any engagement between the two professions. That was not always true. Forty years ago, economic historians such as J.B Condliffe, W.B. Sutch, and Simkin were a part of the total historical discourse to the mutual benefit of New Zealand history.

As an encouragement to a return to that discourse, this paper suggests economic history offers some new and useful insights into the nineteenth century European settlement. It draws upon my Hocken lecture, Towards a Political Economy of New Zealand, elaborated in my In Stormy Seas (especially Chapter 4). However some of the material presented today reflects work which has since become available.

There is insufficient space to deal adequately with the Maori economy. The topic is so large it has to be left to the next millennium. Even so, we should never forget that it would appear that for much of the nineteenth century European settlement was vitally dependent upon the Maori economy for food, labour, and services such as internal transport (as well as contributing to exports). Additionally, the control of land, and its alienation from the Maori was a central economic issue. One day the enormous resource that the Waitangi Tribunal and other research has developed will generate a fresh economic perspective of the land alienation.

The issue which this paper focuses on is that the European economy was unsustainable for much of the nineteenth century. Had the economy continued upon that path, there would have been destitution and outward migration. By the twentieth century New Zealand would have looked rather like the Falkland Islands – a scattered and low population dependant on extensive sheep farming. What diverted New Zealand from this path was the invention and application of refrigeration, but that does not happen until the end of the nineteenth century. Until then there were three activities which sustained the non-Maori economy in the short run, but each was unsustainable in the long run.

The first was the extractive industries which began with the first settlers in the late eighteenth century. It was the political economy of the quarry – of the unsustainable society. Various natural resources were hunted or quarried to extinction: seals, whales, fish, native timber, kauri gum, gold, other minerals. One could extend this notion to even the natural fertility of the soil, which was exploited for short-term gain at the cost of long term degradation. Suppose there had been no refrigeration. What would New Zealand have produced in the twentieth century, which would have been exchanged for imports to maintain an adequate standard of living for the population? By that stage all there would have been for export would have been wool produced on large estates, together with tallow and tinned meat. There would have been no significant dairy industry, no crossbred sheep farming. Exotic plantation forestry would have possibly developed earlier (and the native forests cut faster). Some of the gap might have been filled by selling fresh vegetables and fruit to Australia. We will return to the trans-Tasman dimension.

The second unsustainable activity was warfare. Brendan Thompson’s estimates of the non-Maori workforce suggest that in the 1850s and 1860s around 10 percent of workers were soldiers. In some areas – especially North Island towns – the proportion would have been considerably greater. The soldiers were funded by the British government, and would have had a considerable impact on the local economies which provisioned and entertained them. While there are numerous accounts of the soldier’s military activities, there is little on their economic impact (other than infrastructural investment, such as roads undertaken for military purposes), which would have been substantial for at least a decade. Auckland must have been a garrison town for part of its early life. When Britain decided to stop funding those military activities, leaving it to the settlers, the war strategy changed. Was the peace that broadly occurred from the late 1860s the result of the unwillingness of the settlers to prosecute war for which they now had to pay, rather than as a result of a successful subjection of the Maori?

The third unsustainable activity was foreign borrowing, most of which was for investment purposes, although there was some leakage into consumption. There was a supplementation by investment from domestic sources and from migrants’ funds (including the tools of migrating craftsmen). But foreign borrowing was probably the main source of investment. Borrowing sustained and accelerated economic activity in the short run – Vogelism is an example – but eventually any foreign debt has to be serviced and repaid. Ultimately those payments would require receipts from export sales. Without a sustainable export base commensurate with the debt servicing, the borrowing inflow would eventual cease and the investment, and general economic activity it engendered tail off. That is the story of the depressed 1880s. So foreign borrowing is not sustainable unless the underlying economy is. When it is not, borrowing contributes to unsustainability.

(There may be a viable economic strategy based on exploiting natural resources supplemented by borrowing. If the resources are sufficiently large – Australian’s mineral resources may be – the proceeds from their export sale may be used to transform the economy – with migrants, infrastructure, and businesses – to one which is large enough to be broadly self-sustaining. The jury is still out on whether this strategy will work for Australia, but it has probably not worked for most oil producers. Naru is another example, except it’s sustainable economy – if it has one – has had to be offshore, because of the island’s tiny size. New Zealand’s depletable per capita resource base is far smaller than Australia’s. Even had it been larger, New Zealand is probably too small to ever have a domestic economy which is largely self sustainable. Exports will always be important.)

Did the unsustainable economy affect New Zealand society? One might argue that it was unrecognized by the settlers, whose optimism glossed over the reality. Even so, settler society reflected the underlying depletion. Almost all depletables involve settlements which become abandoned, some to be almost forgotten. This is not just the gold and other mining towns, the failed settlements whose colonists moved on, sometimes to another country, and the abandoned soldier settlements. For instance whaling stations once involved substantial communities.

Some of the settlements that depended on depletables transmuted into today’s cities – Dunedin and Christchurch gold, Wellington whaling, Auckland a garrison. The “refined” society of the towns in the nineteenth century was largely parasitic on quarries, which once exhausted would have dispersed the society too (unless another economic base was found). I suspect those societies were much less stable than the way they were idealised. That many nineteenth century politicians retired to England, suggests they saw local society as transitory.

If there was a refined society, or one that attempted to be, there was also a coarser one, probably best remembered from the goldfields. The male dominated larrikin society is celebrated somewhat more in Australia than in New Zealand, partly because it began earlier and ended later there, and because the quarry economy on which it is based is still a substantial part of the Australian experience. Even so, remnants of the vulgarity may be found in twentieth century New Zealand. The treatment of liquor is a way to trace it. Until 1989 liquor legislation assumed that the larrikin element would dominate if it was not suppressed.

In summary: for the first four fifths of the nineteenth century the New Zealand political economy consisted of a Maori economy, a quarry which was rapidly exhausting depletable resources (which included some military activity), a small sustainable sector, and a mainly urban society parasitic on the other three. Additionally, foreign borrowing temporarily magnified the size of the some of the activities and locations. Because the sustainable sector was small, and liable to be crowded out by the Maori economy, the prospects for the twentieth century, as the depletables became exhausted, were not favourable. The sweating industries of the 1880s arose because the population exceeded that which could be employed by the small sustainable base and the exhausting resource one. The prospect was the labour which supplied them would leave the country.

What changed was the arrival of refrigeration (and other associated technologies such as better shipping) in the last fifth of the century. It created a large sustainable foreign exchange earning sector based on the pastoral production of crossbred wool, lamb and dairy products, which dominated the export sector for the first two thirds of the twentieth century.(1) It also changed the nature of the production process improving the relative profitability of the family farm compared to the large estate. Large farms could be broken up, and viable small family farms placed on them. The success of the Cheviot settlement, the symbol of the breaking up of the large stations, was because prosperity gave the Liberals government the funds to purchase it, and the same forces enabled the family farms to prosper. Those farms needed local supplies, so the servicing towns were strengthened, and so on up the hierarchy of urban sites.

We might reinterpret some of the other social changes characteristic of the end of the nineteenth century as responses to this increasingly sustainable society. Is it merely an accident that New Zealand’s first stable political party – the Liberals – starts up then? Can we interpret the struggle over liquor regulation as the new society founded on a sustainable family farm economy trying to control or eliminate the larrikin society of the quarry? Does the rising importance of women in social life – illustrated by the first feminist movement – reflect a sustainable society where stable family life is both possible and necessary if it is to reproduce itself? Recall that even Seddon desired a more civilised society than the West Coast he represented, and saw women as a key agent of that refining.

The structural transformation diminished the significance of Australia. While it had been the main export destination until the 1880s, for the next nine decades exports went mainly to Britain, and New Zealand remained preoccupied with the mother country. This change of focus plus the burst of prosperity which the improving export prices and the growing pastoral sector engender in the 1890s were almost certainly the underlying reason that New Zealand did not join the Australian Federation in 1901, despite this seeming to be inevitable a decade earlier.

The conventional wisdom readily accepts that the rise of a pastoral industry based on refrigerated exports to Britain was a central feature of the New Zealand economy for most of the twentieth century. Its importance is implicit in most histories of the period, so much so that we have still failed to explore the implications of its relative decline in the last third of the century. But the perspective has distorted our understanding of nineteenth century New Zealand. We interpret it as a largely sustainable economy and society, dismissing the quarry as transitory, which it was, without recognizing it was central to nineteenth century settler society, including the transition to the more sustainable form which occurred at the end.

The neglect partly reflects other historiographic concerns, especially that of Maori-settler relations, although even here there is more to the economic story that a simple wealth transfer, for the Maori and European organised their economic activities in quite different ways. But the neglect of the central role of the quarry also reflects perceptions about the origins of New Zealand. Its foundations may have included those noble ambitions to create a new society which we like to recall. But if so, they were based on misunderstandings and misjudgments. More realistic, and at first far more important, was those who came with the vulgar intention of exploiting a temporary opportunity and moving on when they had exhausted it – an exploitation which involved Maori land for some, and natural resources for most of the rest. On this fragile, temporary, and opportunistic foundation Pakeha and modern New Zealand was founded.

7 December 1999

Endnotes
1. The sustainability was dependent on depletion of reserves of oil and minerals (especially phosphate) offshore. In that sense pastoral farming is no more sustainable than any other major industry in the world economy. However that unsustainability is not so fleeting as the rapid depletion of its resources that New Zealand experienced in the nineteenth century.

Road to Damascus: What Is the Third Way? And What Were the First Two?

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

Listener 4 December, 1999.

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

At the University of Sussex, where I taught in the 1960s, we talked about “the social control of industry, rather than social ownership.” This was a response to an ongoing debate in the British Labour Party, which had nationalised various industries in the 1940s, was nationalising more in the 1960s, and still had Clause Four in its objectives: “the social ownership of the means of production, distribution, and finance.” The point of the Sussex phrase was that ownership is a means to an end, and that there are other ways of pursuing it. In many industries, market competition will give society the outcomes it wants, far better than nationalisation and monopoly.

Another thing I learned at Sussex, if I had not already done so in New Zealand, was the differences within the political Left. We had a dozen marxist parties on campus alone (each claiming to be holier than the others). That applies to the political Right too. Sometimes the only commonality of the New Right (in all its variants) and the traditional Conservative Right is their pursuit of power. (Left factions will often ignore power, favouring holiness.)

These stirrings of the 1960s have considerable relevance for the development of the “Third Way” popularly espoused by Bill Clinton of the US, Tony Blair of Britain, and other European “socialists”. Apparently the phrase goes back to nineteenth century Pope Leo XIII who wanted a “third way between socialism and capitalism”. Today’s socialism and today’s capitalism are very different from that of a century ago. Indeed many of Pius’s ambitions have been attained as each has adopted elements of the other. But the terms are treacherous. When I mentioned “socialism” did you think I was referring to the “communism” of the Soviet Union (or China or North Korea) or did you think of democratic socialism, which “owes more to Methodism than Marxism”?

Much of the Left got stuck in a rut in the 1980s and the 1990s where the means of the past became the ends. Under the onslaught of the New Right, the Left found itself defending institutions and ideas of its past, rather than evaluating the ongoing transformation of economy and society. The Labour Government elected in 1984 found itself torn between its radical traditions and its now conservative leftish ones, and lurched into a set of New Right policies, which the advocates have still not been able to explain in left wing terms. The problem is “modernization”. How does one maintain fundemental values, in the face of new circumstances? Presumably the superstructure of policies must change. But are the values the same or are they changing? Between the values and policies there is an analysis, a theory of society and the economy. How does that change? The same principles applied differently, or new principles?

The chief spokesperson for the Third Way is the director of the London School of Economics, Anthony Giddens, who seems to have Blair’s ear. I first came across Giddens as a “critical analysis” sociologist, much influenced by Marxism (but not Leninism and all). His 1973 book The Class Structure of the Advanced Societies refers to Marx or Marxism on about half of its pages. Yet his 1998 The Third Way has only a handful of references to Marxism or class. I do not know his road to Damascus, although I suspect it involves a lot of latent Methodism – non-conformist Christianity. But a key factor has been the changing class structures and other social and international conditions. He writes that the “class relations that use to underlie voting and political affiliation have shifted dramatically, owing to the steep decline of the blue-collar working class [and] the entry of women into the workforce.” My impression is that New Zealand classes have always been more politically fluid than the British ones, but a similar situation applies here, although the best single indicator of voting behaviour remains income adjusted for the life-cycle.

So in order to support his government, Blair has had to create a coalition rather different from the traditional Labour classes (who feel miffed they are no longer as predominant as they were once). Of course the drover’s dog could have won the last British election providing it was anti-Tory, but Blair is concerned with the future elections. (He wants to ensure no future PM ever has the overwhelming power of Margaret Thatcher. To understand a new government, see what they saw while they were in opposition.) Giddens characterizes the new vision by: equality as inclusion; limited meritocracy; renewal of public space/civic liberalism; the beyond work society; positive welfare; and the social investment state. (I am surprised he does not also include cultural pluralism, which he also discusses). We may well expect these issues to appear in the New Zealand political debate too: with what effect is another matter.

In a slick phrase typical of his style, Blair describes the Third Way as being between the Old Left and the New Right. That overlooks the fact that there was never only two ways.

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

Footnote for Listener 18 July 1998

THE GIDDENS’ “THIRD” WAY

There has always been ways of organizing nations other than the extremes of the raw capitalism of the US and the suffocating communism of the USSR. But “third ways” are very much in vogue at the moment. They usually reflect democratic socialist aspirations grappling with the new world of a globalized economy and the collapse of communism. They need not be solely economic but address wider issues as in this list proposed by sociologist Anthony Giddens, director of the London School of Economics, and adviser to the British prime minister Tony Blair. Giddens’ “third way”.

1. has politics based on new coalitions, which cannot be easily categorized as classes of the left or right.

2. seeks to restructure government at all levels, to promote subsidiarity and address the “democratic deficit”, including constitutional reform, greater democracy, and more local democracy.

3. values civil society and human rights, but sees the state as having a valid role in promoting them.

4. endorses a “cosmopolitan nation”. While recognizing that nations are still important, it also appreciated the complexity of the modern nation and the distinction between the nation and the state, embracing “fuzzy nationalism” and “multiple sovereignty”.

5. favours a “new mixed economy” where the emphasis is not on ownership but on competition and regulation.

6. aims to reform the welfare state into a “social investment state” which shifts spending from money on benefits towards investment in human capital.

7. recognizes that we no longer live in a bi-polar world, and realises that states no longer face enemies, only dangers.

Metrology and the Economy (Report)

This entry was posted in Business & Finance on by .

Paper commissioned by the Ministry of Consumer Affairs and available on their website. (December 1999)

Keywords Business & Finance

The purpose of the study is to:
– provide the Ministry with a resource to highlight the importance measurements are to the New Zealand economy and to the social wellbeing of New Zealanders (this is seen as key to providing effective advice to Government and government agencies)
– provide industry with advice on the importance of measurements to their business
– establish the risks associated with poor measurements, which need to be considered for individual companies and to New Zealand’s international and domestic trade.

See also Metrology and the Economy Paper to the National Measurement Conference, 14 July, 2000.

Development As Freedom: a Great Book by a Great Indian Economist

This entry was posted in Growth & Innovation, History of Ideas, Methodology, Philosophy, Listener, Social Policy on by .

Listener 20 November 2000

Keywords Growth & Innovation; History of Ideas, Methodology & Philosophy; Social Policy

Nineteenth century economists tended to focus on material output, assessing how well off someone was by the amount they could consume. That notion dominates today’s economics. Pushed, an economist might say it is better to have more material goods than less or, perhaps more humbly, that economics was only good at analyzing materialism, so all the other things which make up human happiness are assumed as given, or that they correlate with material consumption. To acknowledge so would, of course, downgrade the importance of economics, and of economists, which might be no bad thing.

An uneasy consequence of this emphasis on material output, is that authoritarian regimes justify their repression of personal liberties on the basis that they can maximize economic growth. It turns out that the claim is not true. Certainly some dictatorships have had impressive growth records, but others have had stagnant or declining ones. The same is true of democracies.

Would people be better off if an authoritarian regime significantly raised their material standard of living? No, says Nobel prize-winner Amartya Sen, whose just published Development as Freedom, based on a lecture series to the World Bank, provides an exceptionally accessible account of one of economics’ most sophisticated thinkers. The book ranges over a wide range of issues – many women will be delighted by the sensitivity Sen shows towards their role in development. Its core notion, which his treatment of women well illustrates, is not what you consume (“opulence” as Sen calls it) but the choices (or “capabilities”) the individual has.

One might think that Sen aligns himself with the New Right which argues that minimizing the state gives freedom (and material prosperity too). However Sen has more subtlety in a little finger that a room full of revivalist Rogernomes. He is an admirer of the market and sees it as an integral part of a liberal democracy. But he sees an active role for the state. Overall freedom, he argues, arise from the contributions of five instrumental freedoms:
(1) Political freedoms: “the opportunities that people have to determine who should govern, and on what principles, and also include the possibility to scrutinize and criticize authorities, to have freedom of political expression and an uncensored press, to enjoy the freedom to choose between different political parties, and so on.”
(2) Economic facilities: “the opportunities that individuals enjoy to utilize economic resources for the purpose of consumption or production or exchange.”
(3) Social opportunities: “the arrangements that society makes for education, health care and so on.”
(4) Transparency guarantees: “the need for openness that people can expect: the freedom to deal with one another under guarantees of disclosure and lucidity.”
(5) Protective security: “needed to provide a social safety net for preventing the population from being reduced to abject misery, and in some cases even starvation and death. Its domain includes fixed institutional arrangements such as unemployment benefits and statutory income supplements to the indigent as well as ad hoc arrangements such as famine relief or emergency public employment to generate income for destitute.”

Sen is a citizen of the world, continually illustrating his themes from India, where he was born, and China, as well as America and Britain where he has held prestigious academic positions. His illustrations continually evoke surprises. Kerala, one of the poorest states of India, nonetheless has a life expectancy of over 73 years, not too different from the New Zealand expectancy of 76.9 years. In contrast, African Americans, living in some of the richest cities in the world, have a shorter life expectancy than those in Kerala. Despite its material limitations, Kerala has organized itself – including its education and health systems – to give its residents substantial freedoms, including that of longevity.

He is also a master of the classics, not just great economists like Adam Smith and John Stuart Mill, but also ancient Indian, Chinese, and Islamic writers. He uses them to ridicule the notion that the Asian values need be despotic. Indeed some ancient Asian writers appear to have been considerably more politically enlightened than Westerners writing at the same time.

I have read a lot of Sen, much of which is painfully dense as he pursues the logic of a closely reasoned case. This book is instead, very readable, with delightful flashes of humour, often deployed to deflate Western pretensions. Writing on the nineteenth century Irish famine, he cites a head of the British Treasury who wrote, “there is scarcely a woman of peasant class in Western Ireland whose culinary art exceeds the boiling of a potato.” Sen adds dryly, “the remark is of interest not just because it is rare for an Englishman to find a suitable occasion for making international criticism of culinary art.” (His substantive point is that the writer has misunderstood the nature of famines, instead blaming the victims. While Ireland starved, it exported food to England.)

I leave Sen’s contributions to economic ethics for a later column. Meanwhile, Development as Freedom is a wonderful book, worth reading, and rereading.

Beyond the Utilitarian University

This entry was posted in Education on by .

Paper to Forum on the Future of Universities, University of Canterbury, 17 November 1999.

Keywords: Education;

“They measure knowledge by bulk, as it lies in a rude block, without symmetry, without design.”(1)

The Idea of a University(2)

If this independent scholar may begin with a quotation from another independent scholar, albeit a much more eminent one. John Stuart Mill wrote in his Utilitarianism:

“It is better to be Socrates dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparisons knows both sides.”(3)

This is a profoundly subversive passage, not only because Mill was challenging the utilitarianism of his father James Mill and his mentor Jeremy Bentham by suggesting there was a hierarchy of utilities, but because it also provides a critique of today’s economic policies. As last year’s Nobel Prize winner in economics Amartya Sen writes

“Utilitarianism has been the dominant ethical theory – and, inter alia, the most influential theory of justice – for much over a century. The traditional economics of welfare and public policy was for a very long time dominated by this approach, initiated in its modern form by Jeremy Bentham.”(4)

It would be wrong to interpret Sen to imply that utilitarianism is no longer so important in public policy. Rather he is arguing for an alternative approach, in which the possibility of choice – of opportunities – is given a separate role from what he (and Adam Smith) called “opulence” – the abundance of material things. The pig or the fool may be happy because they are sated but in their satisfaction they have no choice, no knowledge of the possibilities that lie beyond their current state.

Nevertheless, a utilitarianism which focuses on material production and consumption continues to dominate much of New Zealand public policy, including that to the tertiary sector. The 1988 Report on Post Compulsory Education and Training in New Zealand nicely captured the focus when it said that ‘distinctions between education and training should be avoided’.(5) We may leave philosophers to ponder on the “should”, and turn to the consequence of collapsing the concepts of education and training together. In effect, the sole function tertiary institutions becomes the development of vocational skills for the accumulation of wealth to satisfy pigs and fools. Any educational role becomes subservient, and may all but be eliminated.

This issue is not a new one. One hundred and fifty years ago John Henry (Cardinal) Newman in his great advocacy of liberal education in The Idea of a University, poured scorn upon advocates of the utilitarian university:

“[T]hey insist that Education should be confined to some particular and narrow end, and issue some definite work, which can be weighed and measured. They argue as if everything, as well as every person, had its price; and that where there has been great outlay, they have a right to expect a return in kind. This they call making Education and Instruction `useful’, and `Utility’ becomes their watchword. With a fundamental principle of this nature, they very naturally go on to ask, what there is to show for the expense of a University; what is the real worth in the market of the article called `Liberal Education,’ on the supposition that it does not teach us definitely how to advance our manufactures, or improve our lands, or to better our civil economy; or again, if it does not at once make this man a lawyer, that an engineer, and that a surgeon, or at least if it does not lead to discoveries in chemistry, astronomy, geology, magnetism, and science of every kind.”(6)

With a few minor changes this could well summarize public policy today, in which the function of universities is to provide the skills and the technologies for economic growth. It follows that given this objective, and given today’s conventional wisdom of how economic growth occurs, the policy framework for universities is that they are business enterprises responding to the vocational and consumption aspirations of paying students in a competitive market environment.

However, Newman had a broader objective for universities: that of cultivating the intellect, which is another way of describing Mill’s concern for philosophers over pigs, and Sen’s concern for real choice. Now this does not mean that universities should have nothing to do with economic growth. To the contrary, there are a number of principled and practical reasons it should:

First, as Sen makes very clear, while opulence is not the same thing as choice, greater opulence can in some circumstances give greater choice. He advocates a strategy of developing material wealth and choice, not an either or.

Second, universities are enormous users of the material output of the economy, and they cannot idly stand by consuming such quantities without contributing to its production.

Third, universities can contribute to increased material prosperity, as well as to opportunity and the intellect. If they do not, some other institutions will take over that role, and the universities will be diminished and unable to pursue their other objectives very well either.

Fourth, the economy is one of the central features of the human condition, and inevitably the universities will want to be involved with it in all its various manifestations.

Newman believed in liberal education, but the university he tried to develop was to have faculties of engineering, law and medicine as well as arts and science. We need to avoid the bizarre situation of a Department of Sanskrit, say, justifying itself solely by its contribution to economic well being. Yet the current policy framework forces it to do so, or to be eliminated as its funding is cut. My school motto was ‘Altiora Peto’ – I seek higher things. If that is good enough for a secondary school, it is good enough for universities.

I could spend the remainder of this presentation discussing how we might fine-tune the tertiary sector to pursue better material prosperity. Instead, I shall take up the challenge that Mill, Sen and Newman – and just about every other major thinker – present, and ask how we might change the public policy framework to enable universities to seek higher things, without compromising their contribution to opulence. As is appropriate for an economist, I shall look at the demand side – the objectives of a university – and the supply side – the production process by which a university meets those objectives.

The Objectives of a University

It is fundamental to a liberal society that there is no simple objective for a university or, indeed, for many other social institutions. The notion that a university’s performance can be characterised by a financial bottom line, or the state of its balance sheet, is flawed. This was taken to the absurd limit by the Scott-Smelt report, which seemed to think each university was a property company owned by the central government. Certainly the physical assets of a university are substantial, valuable in market terms, and evident. But as I report in The Commercialisation of New Zealand, they are only a small part of the totality of the assets which make up a university, and the market value of the faculty and student interests far exceeding any property interest. It may be that universities should separate out their property interests into a separate property company, but that would be to quarantine an obsession with physical assets from the central activities of a university.

The single notion which might best summarise a university’s performance may be ‘reputation’, its standing in the world of international scholarship, of the community in which it serves, among its alumni their friends and employers. Reputation is intangible but as Cassio says to Iago:

“Reputation! O, I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial.” (Othello: II, iii)

Assessing reputation is not easy, but public policy might usefully ask itself whether a particular action enhances or diminishes the reputation of the nation’s universities, and among whom.

Who are the trustees, the guardians of a university’s reputation? In the first instance it has to be the faculty, with the authority embodied in an academic body such as a professorial board or senate. In addition there has to be some Council to represent the wider interests of the University. The Scott-Smelt report, with its obsession of universities as property companies, advocated a Council consisting of business people appointed by the government. That could not have more greatly misrepresented a university, not only because it gave oppressive authoritarian powers to the central government, but also because it fails to recognize the diversity of the university objectives. The typical Council with its representatives of staff and students, the Court of Convocation, the local community and secondary schools, economic sectoral interest, is a sensible attempt to reflect the diversity. The Maori has to be included. I suspect a special effort needs to be added to reflect the growing creative activities of a our institutions: the chamber orchestra and not just the School of Music, the writer in residence and not just the Department of English, the art collection and not just the School of Fine Arts, and so on. Should other tertiary institutions be represented? Perhaps where there are close alliances. Should there be a conscious effort to include the growing number of independent scholars? Probably. The ability of Council to add appointees to cover gaps in expertise and interests seems prudent. I have deliberately cast the net widely, to suggest that Councils should not be small. The emphasis should be on representativeness of all the diverse interest universities have. But practically they should delegate decision making to small specialist and expert executive committees. The exception to the current pattern is appointees by the Minister of Education which is problematic in a liberal democracy.

The funding of each university also needs to be as diverse as possible, although given that New Zealand has not a tradition of private foundations and charities, the majority will come from public sources. Even so the development of university foundations and alumni contributions is to be welcomed, especially as individual donations can add the idiosyncrasy of the institution. (I was at a university which was given a valuable stamp collection.) Business and sectoral contributions should not be ignored, providing the university does not become too dependent upon them. That is a caveat for any funding source.

Public funding needs to be diverse and cushioned from direct political interference. The abolition of the University Grants Committee was an unfortunate step away from the liberal democratic state, since it exposes the universities to a direct relationship with the Minister and government. If I had more time I would also discuss the increasing centralisation of the government research funding, whereas diversity of judgement is necessary. New Zealand governance arrangements have put considerable powers of intervention in the hands of government ministers in the name of accountability. The tacit assumption is that they will not use their totalitarian powers. However the past record is that politicians have intervened excessively and I see no guarantee they may not in the future. Better to develop constitutional arrangements which prevent that possibility.

One of the major funding sources of a utilitarian university is fees from students. They are justified because their courses are seen a primarily vocational, with no benefit other than the higher income the student will eventually end up with as a result of the course. We can dispute over what part of the total costs of a university are for teaching, and just what proportion students should pay – all very utilitarian. However, I want to ask a more fundamental question. If the utilitarian model has no distinction between education and training, why should they not also pay for their secondary school education, or their primary school education, or even pre-school education? This was not a question the PCET committee addressed, but I take it their answer would have been that it was all a matter of time and political strategy. After tertiary student fees have been ramped up as high as possible, compulsory secondary school fees would be introduced and increased.

I want to challenge this by a quite different conception of education in a liberal democracy. There is surely the principle that New Zealand children have an educational entitlement (which encompasses a vocational element too). It is best articulated in Peter Fraser’s famous statement:

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

Or from a different perspective, but with the same underlying idea, we have R.H. Tawney’s

“To serve educational needs, without regard to the vulgar irrelevancies of class and income is a part of a teacher’s honour.”

This entitlement – (broadly) free access to educational opportunity – is a feature of all liberal democracies, and is a part of a package which includes a reasonable standard of living, health care, access to a safe and sustainable physical and social environment, and so on, in addition to civil rights. The extent of these economic entitlements reflects the overall national circumstances. They will be less extensive in a poorer country than a rich one. A very poor country might only be able to supply an entitlement of primary education, a rich country will include tertiary education in its entitlement. Where does New Zealand fit on this spectrum? From the 1960s – the Parry Report is the marker – the tertiary educational entitlement was broaden as more students – notably women and from minorities – came up to university and as polytechs became more available. However since the early 1990s that entitlement is being steadily diminished. Are we no longer a rich country and can only offer educational entitlements up to the end of secondary school?

I would like to see a systematic review of the notion of educational entitlement, preferably by a committee not stacked with utilitarians. My inclination is that all New Zealand citizens should be eligible for a tertiary entitlement of three years of post secondary school education and vocational training. After that I would be willing to countenance full cost charging, because by that stage most courses are getting vocational. There would be some exceptions. Assistance may be necessary to ensure there is an adequate proportion of cultural minorities in some programs where culture matters – medicine is an obvious example. Government agencies may want to subsidise the fees for some programs to ensure there is an adequate supply – that was long accepted in teacher training.

I would also provide for an fourth year’s educational entitlement for an extra year of liberal education – essentially it would enable a student to do an honours year in arts or pure science. This raises a very important principle. There has been a tendency to treat all tertiary courses as equally meritorious. It is easy to see how a utilitarian might come to that conclusion, while the government has been hesitant to “pick winners” as the jargon goes. If picking winners means detailed choice – choosing between Sanskrit and Sociology – then it is well for the government to stay well away. But governments can, and should, contribute to the making of broad choices. This paper has insisted that the government should have a commitment to liberal democracy over totalitarianism. That is picking a winner. And a liberal democrat has no difficulty giving some preference to a liberal education.

Admittedly, there will be problems about identifying what is “liberal” education but the gains from making the distinction will outweigh the costs of the occasional mistake or ambiguity. To take another example, it is not necessary to link the same research allowance to every course grant. Some courses are more involved in research than others.

The Production Process in a University

Thus far I have looked at the demand side of the tertiary sector, emphasizing in a liberal democracy there is a need for a diversity of decisions. How is the supply side to respond?

As already foreshadowed, universities are not business and should not be run as businesses. Certainly they should use the resources available to them as efficiently as possible, and should invest prudently. But unlike a conventional business that is a means to an end, not the end itself. The approach since 1989 of trying to force universities into a business mode of operation is ultimately flawed – unless the objective is utilitarian.

This has an important implication for vice-chancellors, who under the 1989 legislation were set up as chief executives of quasi-businesses. Whatever the law says, the practice has to be of the Vice Chancellor as primus inter pares – the first among the equals. Recall that reputation is the simplest way of thinking about a university’s objectives, and that reputation rests with the faculty – the college of academics. The Vice Chancellor heads the college, in a collegial relationship of respect for leadership.

On the other hand, individual faculty members are going to have to take more responsibility for the resources they utilize. This is not a problem unique to the universities – for instance in the medical profession is increasingly facing the challenge of being resource managers. It is partly a question of efficiency, but it is also one of autonomy for if the medics do not take resources into consideration when the make clinical decisions, they will find non-medics increasingly taking the medical decisions for them. The same applies to academics.

This devolution of resource management closer to academic units has been going on over the last few years. Sadly it has not reflecting an academic philosophy so much as the desperation of the central university administration to cope with the declining resources. Even more sadly, most academics have not understood what is going on. Even were the devolution not occurring they would still be under pressure from the resource decreases. It is not a happy situation, and there is little that I can offer – I have spent a quarter of a century working with the medical profession to get them to understand the same problem, and still there is resistance. However I do think that a frank discussion between the central administration and departments would be useful.

That discussion is likely to identify a major weakness of the current policy framework. It is captured by the remark in the white paper, Tertiary Education in New Zealand, that ‘funding for up to three years may be allocated to encourage strategically-focused research portfolios rather than short-term projects.’ Three years for a research project is short term. Similarly, teaching is having to operate on a shorter cycle as its resource allocation becomes increasingly at the whim of students. What this could mean is that eventually the teaching process becomes very flexible, with only temporary teachers hired for six or twelve months a time, with the only permanent university staff being the administration. This will do little for research, scholarship or reputation. The alternative possibility is that there will be increased restriction of entry into course, so that the teaching process is stable, but students have no guarantees of activating their entitlements.

I shall not be surprised if the tertiary system evolves to a mix of the two approaches. Students would start off with open entry into general courses where it is possible to vary scale without compromising teaching standards and for which there is little concomitant scholarship or research. Further on there would be restricted entry for advanced courses, access being dependent upon attainment in the open entry courses. We already familiar with the case to intermediates to professional courses, but it may become more widespread. We may even have universities designating colleges – perhaps polytechs – to teach the open entry courses, because the culture of the different teaching may become so divergent.

Another weakness in the current system is the competitive pressures, which not only aggravate the instability of student demand, but seem to have lead to a deterioration of the efficacy of the supply side. Was the abandoning of the arrangements which gave an Architecture and Design School and a Conservatorium of Music between Victoria University of Wellington and the Wellington Polytechnic really necessary? The current policy framework which encourages competition rather than co-operation between tertiary institutions did not help. There are a number of areas where co-operation may be appropriate. One is the encouragement of specialisation of fields by department at post-graduate level, and the encouraging of graduates to go to the program which best covers their needs.

Another consequence of the competition for students is the deterioration of quality – quality in teaching, quality in content, quality in standards, quality and quantity in associated research and scholarship. There has always been a problem of quality attainment in every university, everywhere in the world. In my experience some of the officials who are passionate defenders of the past reforms are likely to start complaining about some of the bad courses and teachers they had. (They must have been badly taught, given their willingness to use personal anecdote as an alternative to analysis.) The competition and the resource pressures are threatening educational quality, for it is so easy to cut in the short term under stress.

There is no simple answer to maintaining quality standards. A less destructive environment and less resource pressures would be a beginning. The indications are that we are moving down a path which involves benchmarking. In the case of universities that benchmarking will typically be done against overseas universities or departments. (Polytechs may use New Zealand universities as their benchmarks, which will put a different sort of quality pressure on the universities.) This benchmarking is going to have to be done with some sensitivity. For instance, where courses and research areas are New Zealand directed. It would be easy to imitate US standards, say, as have a lot our economics departments, and end up providing the student with little knowledge of a very different New Zealand. While there may be universal principles, the content of the arts, the social sciences, and the environmental sciences do not have the universalism of the physical sciences.

My final observation about the academic production process is that in comparison to the overseas, New Zealand universities have a singular shortage of research centres of international excellence. Too often a local centre amounts to a room, a part-time faculty appointment (with part-time secretarial assistance), a letter head, and little more. Funding has been the constraint, and it is to be hoped that such public sources as Marsden funding, coupled with private monies, will lead to quality centres. Another source of such centres might be to form alliances with relevant Crown Research Institutes, perhaps ultimately leading to a beneficial merger.

Epilogue

There has always been a tendency for New Zealand universities to be utilitarian reflecting the practicality of New Zealand life and a lack of prominence of the intellectual. However, at no time since the Parry report has there been so much pressure to make New Zealand’s sole utilitarian vocational trainers.

At is issue is not merely resisting these pressures, but offering an alternative idea of the university which centres on tertiary education rather than training. From that idea there will arise a different policy framework – perhaps like the one I have explored here – one which does not treat a university as a business, and which recognizes the diversity of objectives which the ideal desires.

Because the modern mass university cannot isolate itself from the international, national, and local society in which it exists, any change to the policy framework – a reduction in its utilitarianism – will be of benefit to the wider society too, not least in its promotion of liberal democracy, of choice and opportunity, and of the value of the intellect.

Endnotes
1. J.H. Newman, The Idea of a University (1853) This edition Oxford, 1976, edited with introduction and notes by I.T. Kerr. p.125.
2. Much Most of the broad analysis in this presentation is developed in my two recent books: The Commercialisation of New Zealand (Auckland University Press, 1997), and The Whimpering of the State: Policy After MMP (Auckland University Press, 1999).
3. J.S. Mill (1863) ‘Utilitarianism’, page 260 of M. Warnock, (ed.) Utilitarianism, Collins, London, Fontana Library Edition, 1962.
4. A. Sen (1999) Development as Freedom, Knopf, New York, p.58.
5. G.R. Hawke, Report on Post Compulsory Education and Training in New Zealand, Government Printer, Wellington, 1981.
6. Op. cit. p.135.

Desperate for Funds: Are We Spending Enough on Health?

This entry was posted in Health, Listener on by .

Listener 6 November 1999.

Keywords Health

Most of us are aware of Multiple Sclerosis victims in wheelchairs or with walking sticks. In fact the disease may have affected the sufferer up to two decades earlier, initially with a loss of muscular coordination – perhaps at first vision, then isolated numbness, to a progressing weakness in the legs. It does not much affect life expectation, nor does it affect intellect. The sufferers know that they will experience an increasing loss of muscular control.

The causes and pathogenesis of MS are “unknown” poorly understood. It is an inflammatory disease of the central nervous system, which affects the sheath around the nerve fibres. It appears to be partly hereditary – the Maori is less likely to suffer from it. It is also environmental, apparently related to temperature – the incidence is about double in the Bluff relative to Kaitaia. Women are about twice as likely to experience MS as men. Perhaps one in a thousand people are likely to suffer from MS.

Although the symptoms can be ameliorated, there is no cure. Recently some drugs have appeared which may slow down the progress of the disease. We cannot be sure because they have not been around long enough for their long term effects to be evaluated. But for some people the medication appears to mitigate substantially the side effects of the disease in its early stages. A particular form of early stage MS involves episodic “relapses” of up to a fortnight in which the sufferers lose muscular control. (Such acute attacks usually resolve themselves over the next month or so, but it appears the more attacks the faster the deterioration.)

The effect of the new drug – it goes by a number of names but I’ll call it interferon-beta – can be remarkable. Marie, a 39 year old mother of two, told a seminar I was at how her life was disrupted by these attacks. “As far as the quality of life goes, I literally wiped out that entire year. Friends were always coming around and helping out, as I wasn’t functioning. I was in and out the hospital all the time.” Her children had to be fostered. She went onto interferon-beta. The relapses stopped. After a month of treatment she was back at work and contributing to her family again. Today she runs a business from her home. Ken, in his early 20s, is back at work too, after a year of regular hospitalisation and a miserable quality of life.

Great news for both of them, except interferon-beta is not publicly provided for the New Zealand health service, so they have to pay for it privately. Since it costs around $20,000 a year, they are at an enormous financial handicap. Presumably others who could benefit are missing out because they cannot find the $400 a week.

The Multiple Sclerosis Society of New Zealand asked me to look at the economics of the drug. My conclusion, based on overseas case studies is that the overall benefits from the drug are insufficient to justify the substantial expenditure. Pharmac, the government agency responsible for paying for free-to-patient pharmaceuticals, has come to a similar conclusion. The detailed analysis is larger than this column can accommodate, (1) but the issue is quite general. One complication is that not enough is known to target only the Maries and Kens, so that much of the use of the interferon-beta will be wasted. But the basic problem is the drug is very expensive. If Pharmac was to fund this drug (it could cost them up to $10m a year), it would have to cut its funding for other drugs (or the Health Funding Authority cutting other services). These drugs are more cost effective than interferon-beta although, of course, they are for other diseases.

It is an uncomfortable story is it not? Here is a drug which can substantially increase some people’s quality of life, and it is a drug which is free in most other countries (Marie initially got her supply free from Australia).

It is not merely a matter of handing over the $10m (or less) to Pharmac and directing them to provide the interferon-beta free, for they will tell you there are others suffering other diseases who are also missing out on treatment which is more cost-effective than interferon. Other health areas are desperate for funds too. (Mental health has just made a plea for $188m over the next three years; alcohol and drug treatment is short by at least $29m a year.) In the long run the cost of interferon-beta will come down, and doctors will learn how to target more precisely. But a lot of MS sufferers will be worse off in that interim.

True, there is an unlimited demand for health care services if the government provides them free. The government is going to have to place some limitations on what it can supply. More public health spending means higher taxes. Looking at Marie and Ken, one cannot but ask “are we spending enough?”

Endnotes
1. A version of the technical paper Who Should Be Treated? Interferon-β for Multiple Sclerosis is also on this website.

The State in New Zealand 1840-1984: Socialism Without Doctrines? (review)

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

by Michael Bassett Archifacts, Oct 1999, p.60-65.

Keywords: Political Economy & History;

According to the author “[t]his book originated in a chance conversation I had in 1993 with Roger Kerr, Executive Director of the New Zealand Business Roundtable. In response to a question about my writing, I told him that I intended to recount the story of the Fourth Labour Government after 1984, but that I first had to understand how it was that New Zealand had come to the stage where drastic restructuring had become a matter of urgency. Roger Kerr suggested that I might undertake that initial study; the Business Roundtable would pay some of the expenses involved in the researching such a big project.”

Bassett’s archival searches have been assiduous. At issue is what he did with what he found. He appears to espouse the methodology which Karl Popper describes as the “bucket”: Pour all the available information into a bucket, leave it to ferment, and then distil some compelling theory. In contrast is the “searchlight”, where a hypothesis directs a beam into some murky corner of our understanding, and the resulting observation modifies the hypothesis and its underlying theory. For instance, in his recently published Only Their Purpose is Mad, Bruce Jesson suggests that “New Zealand was a state-created society in that the state did not emerge from some already-existing social order, some civil society, but instead created it.” (Let me not tease the reader by stopping there and failing to allow a fuller exploration of Jesson’s thinking, but continue the quote, although it is not germane to this review. “The state was responsible for creating the infrastructure of the country – a social infrastructure, as well as an economic infrastructure. And while this was unavoidable, it meant New Zealand was a society without texture. New Zealand might without exaggeration be thought of as a hollow society.” ) The point is that Jesson offers an analytical frame. He may be wrong (or, more likely, oversimple and incomplete), but the fields his hypothesis leads us through will undoubtedly be fertile.

Bassett’s approach is like that of a jackdaw collecting for its nest. All sorts of pretty baubles and curios are assembled, but the jackdaw has no sense of what is valuable or potentially interesting. This nest is hardly arranged at all – Bassett’s chapters follow a chronology, broken into periods which reflect parliamentary terms rather than political economy, but within each chapter the focus lurches around. Because the jackdaw has no judgement, important issues are overlooked. Given the apparent focus of the book, on why the state became so powerful, numerous clues are missed. Throughout the nineteenth century the state kept supporting private enterprise, which might fail even with that state subsidy. For instance, the Midland line, between Christchurch and the West Coast, was initially a private enterprise activity, though cosetted by the state. It failed, and so the state took it over. But Bassett devotes only a paragraph to this story. The story repeats itself. Bassett has a long section on the founding in the early 1950s of the Tasman Pulp and Paper Mill (based on an excellent thesis by Morris Guest), but fails to draw any conclusion from private capital’s inability to fund it. Nor does he note the significance of it having to be a major exporter from day one. The same with the “Think Big” projects, although the author sheds no light on why they needed so much government support. (He does acknowledge their fatal flaw was the substantial fall in the oil price in the mid 1980s.) It was repeated again in a reverse sort of way after 1984, for when the government withdrew its support, business largely stopped investing in the export and import substituting sectors. As the book, perhaps unintentionally, shows, for most of New Zealand’s history the state has stepped in because private enterprise failed.

Other key elements get completely ignored when they fail to attract the jackdaw’s eye. For instance the book correctly points out that both world wars resulted in the New Zealand government accumulating power, but the political impact of the nineteenth century New Zealand wars on the state are ignored. Another lacuna is that the book nowhere gives no sense that the policies that New Zealand was introducing for most of the period, were paralleled elsewhere. (Hence the possibility of Pember Reeves writing State Experiments in Australia and New Zealand.)

Although this book is nominally about the state and the economy (there is little on other roles of the state, such as social control), there is an uncomfortable feeling that the writer has little grasp of the economic issues. For instance, Basset reports that “[w]hile the country’s total population grew by approximately 64 percent during their [the Liberal’s] years of office, the GNP rose 126 percent over the same period. Buoyant export markets meant that for all but 8 of the their 21 years in office the Liberals witnessed real economic growth.” Among the problems with this statement are that he appears to be using a total population excluding Maori (although given the infrequent reference to the Maori in this book , it is perhaps appropriate); he does not explain whether the GNP is nominal or real (it is real); and that the real economic growth refers to per capita GNP growth (not total GNP growth, which occurred in 17 of the 21 years).

Basset also has a penchant for using out of date statistics, He refers to data provided by the 1950 ministerial committee on taxation, not reporting they are explicitly stated as estimates, and has long been superseded by Brent Lineham’s work. He uses a graph from Colin Simkin’s 1951 classic, The Instability of a Dependent Economy, apparently unaware it has been splendidly superseded in the 1990 New Zealand Official Yearbook.

Indeed the book contains a number of graphs from odd sources. Their function seems to be illustrative, like the photos of the various political and public service actors, rather than to progress an argument. The jackdaw seems content to collect facts. However, the economic historian is interested in the relationship between them. Recall the above reference to the buoyant export prices (presumably relative to import prices, that is the terms of trade) in the 1890s and 1900s. The implication in the text is that they drove the economic growth. Their importance in this period suggests that the terms of trade should have been monitored throughout the book. Instead there are but odd asides. The reader has no sense of what Bassett thinks generates economic growth or stagnation.

Curiously for a book about the role of the state in the economy, there is little about fiscal stress. By 1841 the Crown was facing an overestimate of revenue, an underestimate of spending, and was privatising assets and issuing illegal bonds to cover the gap – a portent for the future. Indeed it might be argued that the economic governance of New Zealand could be summarised by the budget being in fiscal stress, severe fiscal stress, or intolerable fiscal stress ever since. (That includes the Fourth Labour Government.) To give but one example, the reason why Harry Atkinson has been undervalued by subsequent generations is that for most of his premiership-treasurership fiscal stress was severe, limiting his creativity as a politician.

As Bassett modestly acknowledges in his introduction, there are many mistakes in the study. I will not provide a list, although I protest at: “Sinclair described Walter Nash’s concept of socialism as being `applied christianity,’ a term that was used occasionally in the late 1930s by Savage.” The term appears to have been coined by the mayor of Kaiapoi, the Rev. W.H.A. Vickery. Not every great insight comes from historians and politicians. Savage used it “on many occasions” according to Barry Gustafson.

Probably there are even more errors of interpretation. For instance, the book fails to mention how erratically interventionist and anti-interventionist the proposals actually were in Roger Douglas’s 1980 There’s Got to be a Better Way. Pertinent to the theme of the book, Douglas wrote (in the year in which the “Think Big” debate) began “[p]utting Government money into Tasman Pulp and Paper Company and New Zealand Steel was right. New industries were started that might not have been, because the private sector would not, or could not, do it.” The book does recall Douglas’s 1978 proposal for the extending the carpet industry, although it glides over the intended state involvement.

Another endemic problem, is the author’s employment of hindsight. Consider his description of the 1940s Secretary of Industries and Commerce, L.J. Schmitt “whose enthusiasm for the certainties which planning guaranteed to manufacturers would not have been out of place in a Soviet five-year planning exercise.” Leaving aside whether the Soviet planners were so enthusiastic, or even whether Schmitt was (there is reason to believe he was not), the statement is objectionable because it fails to acknowledge the widespread contemporary commitment to planning, by left and right. This reviewer, for instance, has had to struggle with the issue working on Bernard Ashwin, the long serving secretary of the Treasury of the same period. Ashwin was undoubtedly a political conservative, but he was deeply involved in planning and micro-intervention. It would be as foolish to associate him with Soviet planning, as it is for Schmitt. Rather the dominant economic paradigm of the day – in the United States and Britain – favoured economic planning. The neo-classical paradigm which replaced it did not become dominant overnight. Indeed the book seems bewildered at the persistence of the planning paradigm in economic policy so, for instance, the Planning Council went on for most of the term of the Fourth Labour Government.

This is a pitfall the author should have been aware of. For instance, in his 1972 Budget speech, new MP Bassett advocated higher top income tax rates, supported additional government spending, and defended the principle of monopoly provision of telephone services “enthusiastically”. A few months earlier, according to his book Third Labour Government, Bassett stated “[f]rankly, being wise after the event, I think we should have taken drastic measures to control land prices and building prices as soon as elected.” All of us are potential hostages to our younger views. Bassett is entitled to say that they were his sincerely held views, reflecting the conventional wisdom of the times, and that he changed his mind with experience, or as fashions changed. However, he needs to be just as generous and understanding to Schmitt, Ashwin, and others.

An account of how he changed his mind would have been fascinating. The last two chapters of the book cover the period after 1975, but they are essentially a politician’s narrative of the events of the day, and offer little insight. In any case, Bassett may not know. The admission in the statement with which this review opens is extraordinary. Almost a decade after he participated in the radical restructuring of the New Zealand economy, a senior cabinet minister concedes he still lacked an understanding of why the policies he supported were necessary. The inevitable impression is that the writer was operating in a political and economic environment without much understanding of the forces shaping it. Whether he is now clearer about why he supported the economic policies of the Fourth Labour Government may be demonstrated in his next book.

A useful starting point may be the inflation which confronted Muldoon through most of his tenure. National was elected in 1975 on the basis that the debauching of the currency, to quote Lenin, would destroy capitalism. Muldoon chose to tackle inflation with the sort of controls that the young Basset favoured, mindful that the alternative of a rigorous monetary and fiscal squeeze would cause economic stagnation, rising unemployment, greater inequality, and social distress. Basset’s report on post 1984 may shed light on whether the Labour cabinet was unaware of this possibility (and the analysis it was based on, which has proven to be a correct), or whether the government was aware, but willing to accept the consequences.

As the book’s subtitle “Socialism without Doctrines?” indicates, and the introduction states explicitly, a second objective was to explore the ideas that drove the New Zealand state. The problem has been that we have tended to judge New Zealand by overseas – European or American – standards (the subtitle alludes to Frenchman André Métin’s judgement of 1901). Because New Zealand political economy is so different, these foreign doctrines do not necessarily characterize the local experience very well. There is in fact a substantial sociological and political literature on the role and ideology of the state in New Zealand, although Bassett shows no awareness of it. Much policy was, as I argued in my Social Security in the Seventies, a pragmatic response to practical issues, with some – often growth oriented or egalitarian – social objectives in mind. It will be interesting to see whether Bassett concludes that the Fourth Labour government broke from this tradition and applied “capitalism with doctrines”. Certainly they and their National successor (in its first few years) were more doctrinaire than any government portrayed in this book.

The difficulty we all face is that economic history and the history of ideas are probably the two most underdeveloped elements of the history discipline in New Zealand. Even had he been better equipped for the journey, Bassett would have been brave to have ventured this book. Writing an account of the state is a very different exercise from writing a biography. It is perhaps useful that he has raised the challenge of an historical account of the role of the state, to complement the extant sociological and political economic studies. Many scholars will, no doubt, use the copious endnotes of the book as a source to many useful archives (although I would recommend they check the originals, for the book’s interpretation is not always reliable). To reiterate, the book is no more than a jackdaw’s nest of interesting items from archival and other sources, with no underlying account to pull it together. If the reader is not looking for one, the book certainly reads well. As Frank Sargeson wrote “there is no talent so deceiving and dangerous as fluency.”

Go to top

Data Doldrums: The State Of the Economy Won’t Do National Any Favours in The Poll

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

Listener: 23 October, 1999

Keywords: Macroeconomics & Money;

Two major economic indicators for the June quarter were released a couple of days before the Prime Minister announced the election date. Both were depressing: the current account deficit – how much New Zealand has to borrow overseas – was at near record levels; while GDP – how much New Zealand produces – declined. There will be no further major official statistics released before November 27th, although the importance of each minor one will be over-played. (Both the Treasury and the Reserve Bank macro-economic forecasts published during the election campaign are likely to be more subdued in comparison to their last ones.)

It is easy to dismiss the two official statistics as aberations. Some commentators did, while the financial markets panicked, driving down the exchange rate and share prices. There is measurement error and random events so we should treat each statistic with caution. Nevertheless the new ones belong to a coherent account of the economy.

The mid 1990s were dominated by one of our longest and strongest post-war economic booms, attributable to a recovery from the stagnation of the 1980s, a sharp rise in our terms of trade (although the relative prices of exports have since fallen back), and a strong world economy. The economy went into downswing in early 1997 (just after the election), but not for long, because of the coalition public spending in the second half of 1997, which lifted the economy into a mild cyclical upswing. It was quenched by the Asian Financial Crisis with its collapse of key export markets. The July 1998 income tax cuts expanded the economy again in late 1998. The most recent expansion seems to be weak (according to the recently published data), and it may even be over.

It is easy to explain the weakness on special factors: the drought did not help farm production, while the hike in world oil prices is raising the import bill and reducing consumers’ effective spending. But such explanations are reminiscent of children who explain all their successes in terms of their beauty, intelligence, grace and wisdom, and all their failures on events outside their control.

The fiscal packages of 1997 and 1998 prove that a government can internally reflate an economy, by increasing domestic spending. But that does not address the external sector, and much of the spending goes on imports. Thus the stimulus of the package is weak on the production side, so the domestic reinforcing (multiplier) effects are muted as imports rise, and the spending blows out through the current account. Unless external conditions are very favourable, we experience weak, fragile upswings easily knocked over by external shocks. There will be another recovery as exports expand again, but those based on domestic expansion (by reducing the fiscal surplus) cannot contribute to prosperity in the short term without compromising the balance of payments.

When will this end? The short answer – which makes we economic commentators appear ignorant (if honest) – is that no one knows. A slightly longer one is that the phase ends when the hooks holding up the US sharemarket fall out of the sky, and the slump in share prices reduces the world’s willingness to loan each New Zealanders the $US20 or so a week, we each need to pay for extra imports. (Another possibility is when the Chinese financial system falls over, with a similar effect. I am assured by experts that the worries of a few months ago no longer appertain. Be very afraid.)

A third possible ending is to change economic policy. I agree with the broad direction of the “Knowledge Economy” package which recognizes that the government can positively influence the production process. But there is also a need to address the tradeable sector. New Zealanders have a huge appetite for foreign exchange. If we cannot earn enough, while given that heavy borrowing is unsustainable and direct import restrictions are likely to be largely ineffective, a reduction in incomes seems inevitable. That means higher unemployment and a lower standard of living.

My forecast is that the economy will look less prosperous a month after the election, than it does a month before. That has happened for most past elections.

Pop Goes the Bubble? Think Of the Sharemarket As a High Chain Letter.

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

Listener 9 October, 1999.

Keywords: Business & Finance;

Every time a share is sold, someone else buys it. So the dollars that someone puts into the sharemarket to buy shares equals the amount the ex-shareholders takes out. Suppose there are more people who want to put dollars in than who want to take them out. The potential buyers will have to give an incentive to some shareholders to turn their shares into cash. That inducement is the price of the share going up. So if cash is trying to get into the sharemarket, the prices of shares rise: if cash is trying to get out, they fall. However, in the actual trading the amount of cash that gets in equals the amount that gets out.

Why is the cash trying to get into a share market? Usually it is because the potential buyers think they will get a better return on their money owning shares than in any other investment. Firms pay dividends to shareholders, so hanging onto shares means a flow of dividend receipts over time. Dividends are risky. The amount paid varies from year to year: sometimes it is nothing; sometimes the firm goes bankrupt and never pays another dividend or other cash payments to the shareholders. That is why shareholders expect a higher return than if they invest in fixed interest securities.

A measure of the return on shares is the “price to earnings ratio” – the share price divided by the profits per share (including dividends) of the firm. Currently the P/E (pronounced “P to E”) ratio in the New Zealand share market averages over 20. So the typical share price is twenty-plus times the maximum dividends it could prudently pay. That is an annual return of less than 5 percent. But one can get a safe uninspiring 6.8 percent p.a. or so, by investing in government stock. Why go into a risky investment for a lower return?

Perhaps the business is going to get better. Corporate earnings may not be attractive this year, but next year they might rise, and continue to rise thereafter. The return on government stock is the same each year. But there is a more exciting reason for investing in shares. Every time money pushes into the sharemarket, share prices go up, so shareholders see themselves better off. Those who sell the shares now have more cash. What to do with it? Reinvest it in the sharemarket. With luck share prices will rise again.

So each time a share is sold at a higher price, somebody is paying for it at the higher price. It is like a chain letter. You send $100 to the person at the top of the list of five, strike the name off, added yours to the bottom, and send it to five more people. If everyone kept to the chain, you would eventually get $2500 for the cost of five postage stamps. This cannot go on indefinitely: eventually the scheme will collapse. Some would have made money, but at the expense of those lower on the list. The sharemarket is a little different because of dividends, but the low returns implied by the high P/E ratios suggest people are not in for them.

The jargon for when share prices cannot be sustained by corporate earnings is called a “speculative bubble”. Almost everyone knows the overpricing from expecting further capital gains cannot go on indefinitely, but they are hoping they get to the “top of the chain” before the bubble pops.

Is the New Zealand sharemarket a bubble? The US sharemarket is, and some of its speculative money has flown into New Zealand driving up our share prices, fuelling local greed. When the international bubble bursts, as it surely will one day, New Zealand share prices will fall too – probably dramatically – as everyone tries to cash up, getting their money out of the sharemarket. What happens to the economy? That is another column, which I dont have to write yet. For clues, look at what happened after the 1929 and 1987 crashes.

**************
From Listener 28 August, 1999

Appreciating the Sharemarket

The regular grumblings in the financial pages about the poor performance of the New Zealand share prices in the last decade reflects a longer problem. In a 65 year period, New Zealand share prices rose 30 percent less than production prices: their real capital appreciation was negative. I could not believe it at first, but there it is in the graphs of my In Stormy Seas (Figures 6.6, 16.3) which Americans Phillippe Jordion and William Goetzmann spliced together (I did not). But their study of the world’s sharemarkets shows New Zealand’s share performance is not that different from the average. It the US which is unusual, with an average increase of 4.3 percent a year more than production prices. Once again we learn the danger of treating the US as “normal.”

The poor performance does not mean it is unwise to invest in shares. Tax effects are important, the data does not allow for dividend payments, and alternative investments may be worse. But be cautious. Those who expected to make a sharemarket killing in the low inflation last 1990s have been surprised. They should have looked at the data.

Trading Platitudes: Review Of Apec in Focus, by S. McMillan, B. Ramasamy,

This entry was posted in Globalisation & Trade on by .

New Zealand Books, October 1999, p.3-4.

Keywords: Globalisation & Trade;

Malcolm Templeton’s Human Rights and Sporting Contacts and Trevor Richards’ Dancing on our Bones are about the same issue although sometimes the reader might think they were in different countries, so different are their perspectives: Templeton provides a comprehensive account of New Zealand’s fraught relationship with apartheid South Africa in the context of New Zealand’s entire foreign diplomacy; Richards’ account is that of the much vilified, but eventually successful (nowadays even respected), protest movement which he led.

Living as I do, on the margins of Wellington Establishment and many protest movements, but closely observing both, I am struck by the enormous difference between their perspectives. Both writers are deeply oppose racism, so one might think they were on the same side (which often happened to be different from the politicians they respectfully served and harangued). Yet each occasionally frags the other. Neither quite comprehends the constraints the other faces: the officials attempting to provide coherence to a foreign policy of which this was but one aspect, the protesters committed to single objective, but riven by tactical and strategic divisions. To say that our diplomats often have a better grasp of other countries’ internal activities than they do of New Zealand’s is perhaps too glib. But I am continually struck by the lack of understanding of government officials from all sorts of departments about anything that is going on north of Tawa or south of The Strait. On the other hand the dissenters seem to have as little understanding of what goes on in between (which is one of the reasons that those in opposition often make ineffective contributions when they are in government).

In another context I would now explore the politicians, the so-called hams in the sandwich. But here my remarks are preliminary to a review of the APEC debate where again the officials and the public could be well in different countries. This time there appears to be no commonality of ultimate objective which is not platitudinous. Moreover economic issues seem to me to be more technical, so it is not merely a matter of the path to attain the end, were it able to be agreed upon.

While I have referred to the “APEC debate”, APEC is symbolic of the wider issue of New Zealand’s role in an increasingly globalized world. Were APEC to vanish, the debate would continue just as ferociously. APEC is especially prominent in 1999 because the annual conference of its members is here, and because the government has chosen to make that conference a key part of its re-election prospects. I doubt it will get as much purchase as the 1981 Tour did. But in a year in which everything else the National government has done seemed to turn sour (if it was even noticed), while things it did not do captured the headlines, APEC must seem a jewel in a battered tiara. (One must say that the professionalism of the foreign affairs ministry has shone through, compared to the disaster of the management of the millennium celebrations, giving a new significance to the expression of being unable to organize a piss-up in a brewery.)

APEC, formed in 1989 when the Australians, in particular, became nervous about weakening of international commitment to globalisation and the dangers of the consolidation of economic blocs, may be an appropriate symbol for globalization. (The EU bloc was the main concern, but the US was also showing signs of isolationism). Thus was promoted a regional grouping around the Pacific Basin. (The “Asia” of the title is anomalous for every member state has a Pacific coastline, while some major Asian economies – especially those of South Asia and the Middle East – are omitted.) It is a loose federation – membership is voluntary – platitudes are spoken, motions are passed, and promises are made. There is no enforcement mechanism.

It is true that the members have committed themselves to free trade and investment in the region by 2010 for developed countries and 2020 for the developing ones. I do not know of any thoughtful observer who expects these commitments to be met in total, although there should be some progress. One will not be surprised if they are hardly met at all. A decade and two is a long time in an economic policy regime. The Bogor meeting in 1994 did not envisage the Asian crisis of the late 1990s, which has led to some members expressing doubts they will not be able to meet the goal. There will be new political leaders in 2020, there may not even then be an APEC as we know, or can project, it today.

If the commitments are met, it will be more to do with each country deciding that the winding back of protection is in the economy’s internal interest. There is a standard economic argument for this. Tariffs, it is said, are penalties on the unprotected (typically export oriented) industries of an economy. Eliminating them benefits the growth-oriented sectors.

New Zealand has made a fetish of extending this approach to a ‘trading naked’ extremism, the term for the strategy of stripping away all interventions, derived from the image of someone at a picnic taking off all their clothes in the hope that others will follow. While we have claimed extraordinary benefits from the strategy, the objective evidence is an embarrassingly poor economic performance: rising unemployment, poor productivity increases, modest economic growth funded by rising overseas debt. The punchline is the rest of the picnic looks at the naked one, and puts on another jersey.

How New Zealand chose the trading naked strategy is a puzzle. I am not sure that the official papers, had we access to all of them, would throw much light. My impression is that its adoption has been ideological – a misinterpretation of what economic theory has to say. Certainly most first year economics courses demonstrate that under certain conditions free trade maximizes economic output. Understandably, those whose ‘peter level’ is Stage I economics are impressed by the elegant result, and do not notice the multitude of assumptions, or go on to look at a variety of conditions where free trade is not optimal. Economists tend to acknowledge them, and then debate whether the deviations from the assumptions are sufficiently large to justify an alternative strategy to free trade. I have no sense that such a debate went on within the New Zealand policy community, or that the complicated judgements that an extreme free trade stance involves were ever made. If there had been a more strategic approach to liberalisation would surely have taken place, rather than the tearing off all clothes.

One political factor is that while the extremism of New Zealand may have done little for the New Zealand economy, or even damaged it, some powerful groups benefited, or thought they did. Undoubtedly the last decade’s economic policy has been very comforting to the finance sector and they in turn have supported it in their self-interest under the misapprehension that what was good for them was good for the nation. The export-oriented resource sector, especially farmers, also thought the strategy would be beneficial, but their gains have been minimal – far less than the advocates promised. Not unsurprisingly the farmers have turned against the National government, although they are split between those who want to intensify the strategy, and those who have doubts.

The difficulty for the public debate is that if the extremist policies are unconvincing, unproven and failed, it does not prove that all strategies which embrace globalisation are as equally unsatisfactory. One has a sense that the (non-farmer) anti-APEC protesters believe both propositions, but their rhetoric is only about the extremist policy options. Many of the pro-APEC supporters appear to see the same limited two.

It is a fundamental requirement of democracy that good government requires an informed public. I have heard enough of both sides’ rhetoric on APEC and globalisation to be confident we have not got one. The danger arises if, as argued in my recently published The Whimpering of the State: Policy after MMP, policy outcomes under the new electoral regime are going to reflect more closely what the public think, rather than what they are told is good for them. If so, poor quality debate about – and poor understanding of – trade policy, will lead to poor quality policy. Conceivably, given a public which sees the choice between trading naked and high protectionism, we could get a government which pursues the latter, which is likely to lead to just as disappointing outcomes as the former has. Over-dressed at a picnic means at the very least going a short on vitamin D, and hardly being able to move means missing out on the fun.

How one raises public understanding is barely addressed, because each side is concerned with ideology rather than education, which requires putting both sides of the case, and encouraging the hearers to make their own evaluation. Government departments are poorly placed to carry out this task, the Ministry of Foreign Affairs and Trade especially so, given its outward looking direction, and its poor connection with the wider population. Admittedly the ministry supports the New Zealand Institute of International Affairs, but that mainly provides a reasonably independent bridge between the diplomats and the Wellington (and wider) Establishment. In any case its interests tend to be in politics rather than economics. This NZIIA member cannot recall a single attempt to grapple with economic globalisation qua economics by a wide debate on the economic issues and options. On those occasions where there has been some nibbling at the topic, the range of expert views has been tightly circumscribed and the discussion has been confined to the platitudinous.

THE NZIIA’s situation is well captured in its publication APEC in Focus. This slim volume – no longer than a long academic paper – is in two parts. Two thirds is an essay jointly written by Stuart McMillan, ex-leader writer at the Christchurch Press and Bala Ramasamy, a senior lecturer in economics at Universiti Tenga Nasional, Malaysia. It compares and contrasts their respective countries’ official attitudes to APEC. It is a useful exercise for it clearly shows that different members can have quite different attitudes to the organization (and probably to globalisation).

But the key element is left out, because there is no mention of the actual trade (and related internal) policies of the two countries. One only need recall Robert Muldoon on sporting links to know that politicians can make all sorts of promises for international consumption, and practice quite different policies domestically. My impression is that New Zealand’s external presentation is not too different from its practices, but I am less sure of Malaysia. I refer not only to prime minister Mahathir Mohamad’s widely publicized statements following the onset of the Asian crisis. I have spent some time looking at motor vehicle manufacturing. Malaysia, like other East Asian producers, has a record of protection and assistance which would fuel every prejudice of an anti-APEC protestor. Perhaps the NZIIA is constrained from looking too closely at domestic policies, but an opportunity to inform has been missed. Of course there is useful information in the booklet. For instance it reports that our foreign ministry argues for APEC in terms of a platform which gives New Zealand more leverage in world affairs, an objective which need not be compromised by a more cautious approach to globalisation than trading naked. Readers of the Templeton book will appreciate the importance of international platforms, although the protesters may ignore the complexities of international diplomacy (until they want New Zealand to take action on some foreign human rights or environmental breach).

I take it that the New Zealand-Malaysian comparison was seen to be too thin by itself, and a paper on ‘The Asia Pacific Region: Competition and (sic) Co-operation or Confrontation?’ by NZIIA president Frank Holmes was bolted on to bulk the publication. This does Holmes no service, for it is a paper first presented in October 1998, with a backward look at the Asian crisis (already then over a year old), quoting a limited number of sources, and providing neither great insight nor a comprehensive overview. (As I write all informed eyes are on China, on which the essay provides no guidance.) There are important and uncomfortable things to be said about the Asian Crisis, the way it is leading to a re-evaluation of Asian growth and prospects, and how that will impact on APEC. (A detailed study of the motor vehicle industry would provide insights). Sadly the opportunity was missed.

Perhaps I am asking too much. This booklet may be for the foreign affairs corps, their local friends, and their overseas equivalents. It is not one to give the more thoughtful anti-APEC protestors (yes there are some, and some even for the turning) and expect them to become much better informed.

In many ways APEC is a distraction from the real issue of globalisation. If there is any international institution we should be focusing on, it is the World Trade Organization, with its power to make binding decisions on international trade malpractices. (One might regret that did not meet in New Zealand in 1999.) Most of all, we need to be thinking about globalisation far more rigorously than either the shouting match which has dominated the public debate on trade policy, or the tiptoeing around the crucial issues which seems to go on within the two camps. Until we do, we are likely to be left with an international trade and domestic industrial policy inimical to the interests of the New Zealand, either because it is extreme, or because a moderate one is crudely applied. It is far from clear how we move to a more sophisticated debate. If the result of the 1999 focus on APEC is a review which concludes “could do better,” we may be at last on that way.

Books referred to in this review.
B. Easton The Whimpering of the State: Policy after MMP (Auckland University Press)
S. McMillan, B. Ramasamy, & F. Holmes APEC in Focus (Lincoln University Press and Daphne Brasell Associates, in association with the New Zealand Institute of International Affairs)
T. Richard Dancing on our Bones (Bridget Williams Books)
M. Templeton Human Rights and Sporting Contacts (Auckland University Press)

Picking Winners:

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

To enhance economic growth the government needs to stimulate economic change.
Listener 25 September, 1999.

Keywords: Growth & Innovation;

Those who proposed the early 1990s science sector reforms knew little about scientific research or economics. Just as the innkeeper Procrustes required all guests to fit his beds exactly, commercialisation was imposed on all activities. So the DSIR was replaced with a Ministry for Research Science and Technology for policy advice, a Foundation for funding, and commercially oriented Crown Research Institutes as the state research providers. The ideologically driven reforms soon proved cumbersome and inefficient. They are now being reversed, towards where they it would have been, had pragmatism and commonsense been more prominent in the early 1990s.

Thus the mid-August “knowledge economy” package. It was criticized for being ineffectually small (calling it “bright future” was not a bright idea), but its real importance is a signal of the redirection of economic policy. As Science Minister Maurice Williamson admitted, market forces could not always be left to themselves. The package represents a shift from that theory of growth – that the forces would do it all by themselves – which has been so ineffective over the last 15 years. The government is now into “picking winners” – some sorts of economic activities are more growth enhancing than others, and it reinforces them. (Williamson said his admission might sound like swearing in church. Perhaps it was more like popping into the TAB with the collection.)

As I wrote in my column, View From Abroad: What Do We Know About Economic Growth? (May 22, 1999) economists know little about what drives economic growth. But the little we do know suggests that advances in knowledge are intimately involved. To enhance growth prospects the government needs to stimulate technological change. Much of what it does will be wasted. Every “winner” will not win. The aim is to win enough to pay all the bets. To do so pick fast horses – technology is one of the fastest. Even so, I have some doubts with the current strategy.

First the package is too small. A key component of the knowledge economy is our tertiary institutions. They are desperately underfunded. The University of Auckland has only 72 percent per student of what Sydney University has. Nor will the package do much to encourage firms to increase spending on research and development.

The second caveat is that package is too elitist. Notwithstanding my earlier remark that we should be spending more on tertiary education, we are also going to have to do more for ordinary workers, who are key in the application of new technology. The story is told of a firm complaining to its workers that a new piece of machinery was breaking down too often. Those manning the machine said they had never been trained to run it. That was a management failure, but the story shows how workers’ technological competence is critical. Our elite may be well prepared, but the average New Zealander is not. How else to explain the anti-scientific attitudes evident in the support for some alternative medicines? (How to explain a newspaper being gulled by a public relations campaign to give massive front page coverage to a so-called cancer cure which had not even been tested on humans?) The entire public’s scientific and technological understanding has to be raised.

Third, we know that growth in a small open economy is dependent upon the performance of the tradeable sector, which earns or saves foreign exchange by exporting and substituting for imports. The tradeable economy needs at least as much attention as the knowledge economy, although best to get the two horses in the same harness.

The August “knowledge economy” announcement is yet another backdown from the policies which have led to the past low economic performance. We are at last admitting that the government can enhance economic performance by disciplined interventions which apply across broad sectors (rather than the firm specific interventions of before 1984). But have the horse got enough oats, are the jockeys really committed to winning?

***************
Stable Environment?

Shortly after the knowledge economy package, its presiding minister, Max Bradford, opined that we should focus research in a few elite universities, and let the rest be confined to teaching. An obvious retort is that on current levels of funding there cannot be any internationally elite institution. More fundamentally, bet on horse not the stables they come from. Even internationally top rate universities – the Cambridges and MITs – have weak departments, while some of our polytechs run nationally (even internationally) significant programs. The commitment needs to be to the best, not to a handful of universities.

How might can this be done without heavy handed government intervention? When I was teaching at the University of Sussex in the 1960s, the British government made generous grants to top students to do graduate study in particular programs. The new university already had a world class Institute of Development Studies and Science Policy Research Unit. Our offerings to funded economics students were restricted to development economics and industrial economics. We still had to compete with other universities so the students judged our quality. This arrangement may not work for population-smaller New Zealand, but the principles of tertiary specialisation and graduate student judgement apply here too.

Global Warning: What Would Bruce Jesson Have Said About Apec?

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

Listener 11 September 1999

Keywords: Globalisation & Trade;

I wish Bruce Jesson were here, especially as I write this column about APEC. Bruce and I use to discuss our putative writings. Never directly of course, but after a mulling over, one of us would say “I’ve been thinking about writing a column on this issue, and …” Sadly, we dont know what Bruce would have written on the APEC conference, but there are hints in his last major article.

Following the publication of his Their Purpose is Mad Bruce wanted to write a successor book shifting from the analytic – what has happened – to the programmatic – what could happen. The strategy was to write a set of essays for the Political Review, and reconstruct them into the book if the cancer gave him time. Alas it did not, and the only part he wrote was “To Build A Nation”. (We often talked about nation building.) Now I am not going to summarise the essay (read it for yourself in the April 1999 edition). It is pregnant with ideas, in effect his final testament. In it there are clues to APEC.

Significantly, he shows an impatience with his past record: “Most of what I wrote in the 1970s was negative in tone. I attacked ….”. The new book was to have reversed that, to offer an alternative. He applied this criticism to others including, may I hazard, those who criticize APEC. It is one thing to say there is an alternative. The issue is what is it? Demonstrators tend not to have them. What is a coherent anti-APEC manifesto?

There is also a paragraph which Bruce often expressed more strongly to me. The critics do not actually tackle the economic issues. They know hardly any economics. Bruce was not, of course trained as an economist, but he was quick enough and interested enough to grasp the key issues. He placed narrow economics in the wider context of political economy, arising from his studying of Georg Hegel and Karl Marx and their successors. What I am now about to write is my best understanding of Bruce’s position, although we never discussed it in this way and I may have got him wrong.

By way of background, nineteenth century Europe was dominated by the painful transformation of industrialisation. Some socialists – Pierre-Joseph Proudhon in his Philosophy of Poverty is a prime example – argued the solution was to go back to the agrarian society which was being destroyed. Marx retorted with his Poverty of Philosophy. His thesis acknowledged the pain of industrialisation but saw it as a part of the sweep of history. The redemption was that eventually the new economy would lead to a classless society in which workers would be the beneficiaries.

Bruce almost certainly saw globalisation as parallel to, and as inescapable as, industrialisation, driven by similar material forces of history (although that may be cruder than he would have put it). His final essay is about that process. (As an aside it quotes Marx and Friedrich Engels to demonstrate globalisation was a nineteenth century phenomenon too.) Nations are integral to the global economy. It “requires national political structures, if only to provide a system of law and authority and basic economic and social infrastructures.” I have no sense that Bruce thought globalisation would necessarily lead to a better world. Rather the essay begins to explore how to build a New Zealand nation which could benefit from the opportunities globalisation creates, although it is adamant that New Zealand is currently suffering. Unfortunately we dont have the rest of the book. We’ll have to write it ourselves.

‘Well, Bruce, thanks for the ideas for the column. Are you going to demonstrate against APEC yourself?’

That engaging impish grin. ‘Think I’ll go to the demonstration against the US lamb tariffs.’ It would not just be the freezing-workers son’s solidarity with farmers. The world’s largest trading nation with its rhetoric of, and interest in, globalisation screws smaller nations when it suits its national interest.

With a Whimper: Put Public Service Back in the Public Service

This entry was posted in Governance, Listener on by .

Listener 28 August, 1999.

Keywords: Governance;

In the opening chapter of Das Kapital, Karl Marx wrote in 1864 how recent developments in economics had “discovered the content” of value theory. His excitement is palpable, for the labour theory of value seemed to underpin his concerns of human alienation in industrial society. Unfortunately the theory does not quite work. Marx struggled with the idea, never completing Volume 3 (the text being put together from Marx’s notes). We all have brilliant ideas, which seem to solve the problems of the universe yet, as time go by, we realise are flawed. Fortunately, like Marx, we are not usually in a position to implement our faulty theories. When we are, things can go desperately wrong.

That happened in the 1980s, when some officials thought that by running government agencies as businesses, problems with which the Treasury had been struggling would be resolved. There was no pretesting of their theory. It was directly implemented in the 1988 State Sector Act and the 1989 Public Finance Act. Unfortunately the brilliant insight has not worked. Today we see failure after failure – ranging from the fiasco over the previous auditor-general to the bizarre goings on in WINZ. The picture of the public service is of a ship of state which keeps springing leaks. Whenever the shipwrights repair one, another appears. The Prime Minister in the premier cabin, is complaining about Captain State Services Commissioner (but she chose the ship). Those manning the bilge pumps know that something is desperately wrong.

A fundamental idea behind the 1980s reforms is deeply flawed. You cannot run a public service as if it is a private business. Professor Allen Schick’s 1996 report, Spirit of Reform sets down why. The reforms were right to give public servants the freedom to manage. But they overreached themselves by trying to commercialise the public service. Imposing business practices is destructive to good public practice. The required reform is not a matter of repairs. It is a rebuilding the ship. We need to put public service back into the public service.

The most important cabinet appointment after the 1999 election will be the Minister for State Services. (The Treasurer is the key appointment, but we know whatever happens, we are going to get a good un.) In the past, the portfolio has been given to an overloaded minister, because the State Services Commission could be relied upon. But today it needs a fundamental rethink, which the Commission – busy with day-to-day management – is not going to do by itself. If the Prime Minister appoints another part-time Minister, she will find state sector problems crucifying the government, as is happening to this one. Much of the recent bad publicity is not its fault – other than it chose the vessel.

I will not preempt the likely changes. But Schick was anxious about the abandoning of input control, so we may see a return to greater SSC and parliamentary supervision of the production process (which is currently the statutory responsibility of each department’s chief executive). I shall not be surprised if the SSC gets more involved in the appointment of the second managerial tier (instead of leaving it to the CE). One important reform would be for parliament to set some rules about how MPs may criticize public servants. As ministers have avoided responsibility, the attacks on their officers have become too brutal. However, public servants cannot attack back. Parliament’s treatment of the Commissioner of Inland Revenue has not only been unacceptable, but it will inhibit any decent person taking up the job in the future. Yet the integrity of the tax system is fundamental to a civilised society (as recent sad experiences in Russia show).

The ship of the state sector is not going to sink over-night. Rather it is wallowing in the seas. Or to misquote T.S. Eliot: it goes down, not with a bang but a whimper.

********
From Listener 17 July, 1999.

No 1 WINZ

Journalists joke “it fell off the back of a bus”. More often they make careful use of official resources. Recently, a senior Treasury official apologised they had nothing on a topic I asked about, but insisted sending the nearest paper. Meanwhile, a Reserve Bank official zipped back a request for some specialist data by email. All so typical it hardly bares mentioning.

Later that day I rang Work and Income New Zealand. The hostility of the officer and her supervisor was palpable. “What do you want the data for?” The Official Information Act gives the right to information without justification. (As it happens all three questions were about meticulous cross-checking of results which are unlikely to appear in public.) Eventually I was told I would get an answer in 21 (working) days. Apparently the new department has not got round to its public relations. One wonders how WINZ treats some poor sod who wants a benefit or a job.

*********
From Listener 9 October, 1999

Parliamentary Patronage

The revelation that all the appointed members on the Lotteries Board were National Party members does not tell us that National are the gambling experts. Rather it illustrates the practice of governments appointing their friends and relations to public office. Patronage is hardly ever studied by academics – maybe they are hopefully of being its beneficiary one day. Yet it is a fundamental lever of government, albeit one usually hidden from the public. Even if the government goes for competence, a large chunk of the able are excluded by not being politically acceptable. It is like never appointing a woman because of her gender.

MMP may break the stranglehold of the party in power over patronage appointments. There were explicit provisions in the Coalition Agreement, but that has lapsed. Better still, let’s go for a balance of appointees reflecting the balance in parliament, rather than just the politically correct. That should raise their average competence. Today it often appears that when the appointment was made, competence was judged a negative.

Income Distribution and Equity

This entry was posted in Distributional Economics on by .

D. Milne & J. Savage (ed) Reporting Economics: A NZ Guide to Covering the Economy, (JTO, 1999) p.103-110.

Keywords: Distributional Economics;

The morning this section was drafted, I listened to a lead story dealing with a statistical study which showed income inequality had been increasing over the last 15 years. The work was familiar because the results had been first reported three years earlier. The presentation made the New Zealand cricket team look world class. The journalists confused wealth and income, gross income and net income, income levels and income shares, and percent change and percentage point change. Deductions were drawn that simply are not in the data. Given it was one of our top news teams, the inference to any journalist faced with a story about the income distribution is “dont”.

Yet the material was newsworthy. The public cries out for this sort of information. “Is it fair” underpins many stories, in the economic, social, and criminal domains. Instructively, the interviewed spokesman for an Opposition party said the income distribution was as important as real income growth (and the government minister said it was not). How is a journalist to meet the strong public demand for discussion on equity issues, but avoid the minefield of the technical complexities? (How is this writer to pack into the space provided an adequate coverage, when writing for a technical audience is difficult enough?)

This section first explains the general issue of assessing equity, defines a few key notions in the following section, and finishes with some remarks on strategies of how one might handle economic equity stories.

Equity and Other Treacherous Concepts

As any philosopher will tell you, that most people are ready to talk about fairness, does not mean it is a rigorous concept. Economists appear to avoid the issue by referring to distributional “equity” (the noun also has sharemarket meanings). But of the nine economic dictionaries by my desk, five do not define the term, and the rest say it is “fairness”. In comparison many other well used notions – like GDP – are reasonably precisely defined.

Once economists thought they could avoid making judgments about equity, and still draw policy conclusions. To simplify, it seemed that “efficiency” could be increased without affecting economic equity. Unfortunately, as so often happens with technical jargon, the economist’s notion of efficiency is treacherous to the layperson. Economists sometimes talk about the “efficiency-equity tradeoff”, with the implication that in order to achieve greater efficiency there will has to be a loss of equity. That cannot be true, in the normal meaning of the words. Imagine a leftwing Treasurer announcing their government’s policy was “to pursue equity inefficiently”, which appears to be the commonsense meaning of the tradeoff.

Economists have some rigorous notions involving equity. Here are some common examples, although inevitably the simple exposition has suppressed caveats. Horizontal equity refers to two people in similar circumstances being treated exactly the same. Typically the similarity of circumstances includes the same income, and similar personal and family characteristics. For instance it would be equitable (i.e. fair) to give two people on the same income the same health or educational entitlements, even though one was, say, a beneficiary, the other a worker. Vertical equity is the principle that people in similar circumstances, except for different incomes, should be treated on the basis of ability to pay. This was a traditional justification for progressive income tax, but has not been a central policy principle in recent years. Intergenerational equity is a form of horizontal equity, in which the situation of different generations with similar circumstances are compared. It has been important in recent years in regard to government borrowing (which places a burden on future generations), and retirement policy. Very often we want to make comparisons involving those not “in similar circumstances”, but rigorous comparisons are not defined. It can be argued that two people are always in different circumstances.

In these various judgements income plays a major role. Economists can measure the income distribution, without necessarily making judgements about it. There are a myriads of ways of doing this, for there is no agreed universal measure. A little of the complexity is shown in the appendix table, where 17 estimates of “average” weekly income from 5 data bases – all quickly available from the 1998 New Zealand Official Year Book and the most recent (1996) census. In case the basic point be missed, another 17 could have been presented. It will be evident to the casual reader that here are treacherous waters, because anywhere between $883 a week and $244 a week can be shown to be as an average. There is not the room to go through all the lines, so a couple of examples will be sufficient.

First, I have seen enthusiastic journalists combining the average male wage and the average female wage (line 1) to get an “average” household weekly income of $1226, whereas even with benefits added in it is about $880 (lines 4,8).

Second, the ACT party proposed a private contributory superannuation scheme which appeared to be very favourable to most people compared to the state New Zealand Superannuation Scheme with the same contribution. But it was based upon the mean wage (line 1) being a fair representation of the average incomes. (Averages, means, and medians are explained in the next section.) Inspection of the table shows that it is not. Many households and adults are not in receipt of wages and salary (for a full year), and on average their income is less than average earnings. Moreover, because the distribution is skewed towards higher incomes, less than half of wage earners receive more than the mean wage. A better measure is the person in the middle of the distribution. Typically this median is 75 to 80 percent of the mean. Thus the ACT figures were favourable because they chose the wrong average, which meant a scheme which benefitted upper income people was presented as if it was of benefit to those on middle incomes.

This last point draws attention to the simple statistical point that an average says something about the middle of an income distribution, but little about the dispersion in the distribution. There are formal measures of these (including standard deviations, variances, coefficients of variation, gini coefficients) which one will find in standard statistical textbooks. That adds to the difficulties. Not only are there numerous relevant definitions of income, but there is no simple way of summarizing an income distribution to determine uncontroversially whether there is an increase or decrease in equality. Consider the following three cases of the income distribution shared between five people A, the poorest, to E, the richest, and in which the total income in each case is the same (150).

CASE 1 CASE 2 CASE 3
A 10 15 13
B 20 25 18
C 30 30 28
D 40 35 38
E 50 45 53

In Case 2, 5 units of income has been taken away from the two richest and given the two poorest. Undoubtedly Case 2 involves a more equal distribution than Case 1, on any common sense or rigorous definition. But in Case 3 in comparison to Case 1, 2 units have been taken away from the middle income people (B,C,D), and shared between the poorest and the richest. Is Case 3 more or less equal than Case 1? There is no rigorous value free way of answering this question. We can add our values, but a journalist’s story may not be nearly so interesting if the “objective” expert has to admit the values they are using. On the other hand the reader/viewer is surely entitled to know that what is being reported is not some objective statistical fact, but a lot of opinion.

Defining Some Concepts

The previous section has been largely about problems which are so fundamental they puzzle economists. There is an underlying conceptual structure, which if misused compounds the confusion. Here are some frequently muddled standard dichotomies. (To get the main ideas across, some simplifications have been made.)

Wealth is the stock of assets held by a person: income is the flow of (mainly) money revenue to an individual which can be spent and save (so it excludes wealth transfer, such as receipts form selling a house, and employment costs). Income may be earned from labour activities (including wages and salary and the labour earnings of the self employed), it may be market consisting of earned income and income from wealth (interest, dividends, profits of the self employed, (possibly capital gains), and so on). Typically, but not always, total income includes market income plus social security benefits.

Gross income, without any tax deductions: net income is after income taxes are deducted (and usually) social security benefits added. Sometimes the expressions before tax, and after tax are used. After tax (and benefit) income is called disposable income.

An income level is some many dollars per period: an income share refers to the share of a group (often a decile or ten percent of the total individuals/households involved). A fall in income share need not necessarily mean a fall in the income level, since the shares of other income levels may have risen even further.

A percent increase measures the relative increase in the variable: a percentage point increase measures the absolute increase in a percent. For instance if an income share rises from 6 percent to 9 percent, that is a 50 percent increase, and a 3 percentage point increase. (Incidentally, try not to use a percentage when it exceeds 100 percent. Even if the journalist does not get it wrong – about four out of five times they do – the public will. For instance a 200 percent increase, means the new level is 3 times the old one.

The mean income is the total income divided by the total number of units; it is the most common form of “average”: the median income is the income of the middle person ranked from top to bottom. both are measures of “central tendency” of a distribution (as is the mode, or most common income). As a general rule means have superior statistical properties, but the median, may be a better indicator if the concern is a typical person because it is not so influenced by the extreme top incomes. Because the public is uneasy about “median”, use “middle income” or “the income of the person in the middle of the distribution.” Note there are also measures of the dispersion, or the width, of a distribution, the most common being the standard deviation.

To do justice to poverty, a state of economic deprivation, would take as much space as this again. Absolute poverty is when the person (or household) has insufficient material goods and services to subsist on: relative poverty is when the individual has insufficient to be able to participate and belong to their community. There is no official poverty line, but the most commonly used one is that set by the 1972 Royal Commission on Social Security as the level for someone on a social security benefit. Subsequent research suggests this benefit datum level (BDL) remains a plausible estimate of a relative poverty line. In March year 1998 prices the BDL was about $300 per week for a married couple. In the March 1993 year about 16.3 percent of the population had incomes less than the BDL. There is a vigorous debate, some of the contributions to it are nutty, few are value free.

Dealing with the Income Distribution

The basic advice remains “dont.” If the chief reporter has asked you to do an income distribution story and the usual avoidance strategies have failed (refusal, handing to a subordinate, taking a sickie, asking for a pay rise, resignation) the following seem to be the main strategies to prevent yourself preforming like a New Zealand middle order batsman.

1. Be humble. You dont know much about it, so admit that when you are pressing the expert.

2. Watch for flannel from the expert. If they cant explain it to you, they probably dont understand it themselves.

3. Repeat what you have been told in your own words. Show the expert any text you have prepared.

(The problem here is how do you identify an expert. Some economists are so keen for media coverage they will claim expertise on anything, especially where they can expound their personal values in the guise of objectivity. Most of the top journalists I know build up a relationship with good economists, who tell them who is the experts in the field.)

4. Ask the expert, if he or she has not indicated already, where they are making personal value judgements (as well as technical judgements). Ask them who is likely to give an alternative account of the story.

5. Beware of your own values. Why have I never heard a journalist mention that a hike in interest rates means that those lending to financial institutions will receive a hike in their incomes? Why do they always emphasize mortgages (according to the 1996 census only in 37 percent of private dwellings do the usual residents make mortgage payments, 32 percent own their own home without mortgage, 27 percent make rent payments, and the rest dont pay anything)? OK. so this is a rhetorical question. I reckon the answer is that most journalists are so badly paid they still have mortgages. In other words, journalists have personal values, like economists, and you need to be aware of them too.

Go to top

Bibliography

Here are works that should be in your library. I have omitted a few poor quality references, like one which does not even source its data.

The official data is in sources like
Statistics New Zealand/Department of Statistics (various years) New Zealand Census of Population and Dwellings. (various publications)
Statistics New Zealand/Department of Statistics (various years) New Zealand Official Year Book.
Statistics New Zealand/Department of Statistics (various years) Incomes, Wellington.
Department of Statistics (1990) The Fiscal Impact on Income Distribution 1987/88.

Easton, B.H. (1983) Income Distribution in New Zealand, NZIER Research Paper No 28, Wellington. (This has a lot of useful definitions.)
Easton, B.H. (1996) “Income Distribution”, in B. Silverstone, A. Bollard, & R. Lattimore (eds) A Study of Economic Reform: The Case of New Zealand, North Holland. (Instead of saying this is the most authoritative study of the 1980s and early 1990s, let me state that this is probably why I was asked to write this section.)
Mowbray, M. (1993) Incomes Monitoring Report: 1981-1991, Social Policy Agency. (Hopefully there will be an update to this report.)
New Zealand Planning Council (1988) For Richer or Poorer: Income and Wealth in New Zealand, Wellington.
New Zealand Planning Council (1990) Who Gets What? The Distribution of Income and Wealth in New Zealand, Wellington.

Also the Social Policy Journal of New Zealand, which has most of the contemporary debate, and New Zealand Economic Papers. An important paper is B.H. Easton,“Poverty in New Zealand: 1981-1993”, New Zealand Sociology, Vol 10, No 2, November 1995, p.182-213.

Go to top

Definitions are in the text above except as follows this table. (Adult: over 15 years old.) The website has limitations relative to a page, which means the table here is less attractive.

ESTIMATES OF AVERAGE INCOME ($ p.w.)

Name Average House-
hold		 All
Adults		 Male
Adults		 Female
Adults		 All Notes
Below
1. Gross
Earnings		 Mean 620 693 533 1
2. Gross
Income		 Mean 409 506 326 2
3. Gross
Income		 Median 300 430 239 3
4. Gross
Income		 Mean 883 4
5. Gross
Income		 Median 667 5
6. Gross
Income		 Mean 323 6
7. Gross
Income		 Median 244 244 7
8. Gross
Income		 Mean 879 8
9. Gross
Income		 Median 667 9
10. Gross
Income		 Mean 318 10
11. Gross
Income		 Median 242 11
12. Gross
Income		 Mean 426 541 317 12
13. Gross
Income		 Median 0 291 428 242 13
14. GDP Mean 491 14
15. GDP Mean 635 15
16. Net
Income		 Mean 305 16
17. Net
Income		 Mean 395 17

Notes

1. Gross Earnings: Total wage bill divided by Full time equivalent employees (i.e. part-time people treated as a fraction). (Feb, 1997) Source: Quarterly Employment Survey, Table 14.13 of NZOYB

2,3. Gross Income per adult. (June 1997) Source: New Zealand Income Survey, Table 14.14 of NZOYB

4,5. Gross Income per household. (1996-97) Source: Household Economic Survey, Table 6.13 of NZOYB

6,7. Gross Income per person. (1996-97) Source: Household Economic Survey, Table 6.13 of NZOYB

8.9: Gross Income per household. (1995-96) Source: 1996 Population Census, 1996 National Summary, Table 37.

10,11. Gross Income per adult. (1995-96) Source: 1996 Population Census, 1996 National Summary, Table 37.

12,13. Gross Income per person. (1995-96) Source: 1996 Population Census, 1996 National Summary, Table 37.

14. GDP per person. (1996-97) Source: SNA (System of National Accounts), Table 17.1 of NZOYB

15. GDP per adult. (1996-97) Source: SNA (System of National Accounts), Table 17.1 of NZOYB

16. Net Income per person. Source: SNA (System of National Accounts), Table 17.9 of NZOYB

15. Net Income per adult. (1996-97) Source: SNA (System of National Accounts), Table 17.9 of NZOYB

Go to top

Economic Globalization and National Sovereignty

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

In R. Miller (ed)New Zealand Government and Politics OUP (2001) p.14-24. Written in August 1999.

Keywords: Globalisation & Trade; Governance;

In recent years there has been increasing concern that a phenomenon of economic globalization, in which the economic processes of production, finance, and exchange in each country are becoming more interdependent between countries, is undermining the sovereignty of the state. In the New Zealand of 1999 this was symbolised by APEC, one of the agencies which promotes this globalisation, albeit a minor one compared to the IMF, World Bank, and WTO (World Trading Organisation), but the government’s focusing on it as a part of its (failed) reelection strategy, because it was hosting the annual APEC conference in September 1999 in Auckland (and numerous preparatory ones before then) gave the organization an undeserved prominence. In particular there was widespread public discussion, much of it reflecting a concern, and some of it generating unrest because APEC (and more fundamentally globalisation) was seen to be against New Zealand’s interests, in contradiction to the government’s expressed belief that it was beneficial. Much of the debate, if it may be called that, from both sides was simplistic and rhetorical, missing the complexities and subtleties of the issue. Rather than provide a yea or nay, this chapter tries to set down the context, first by wading through the narrow economics, but later by opening up the topic to place the economics in the wider context of political economy.

Economic globalization is not a new phenomenon. Arguably the world was more globalized in the nineteenth century when migration was much easier, and national governments’ ability to interfere in the flows of capital and goods very limited because they had less political power and fewer policy instruments. Even so, since in the last half of the twentieth century there appears to be an intensification of globalization, after a period of greater barriers to economic intercourse in the earlier half of the century. Moreover, over the last decade, the process seems to be accelerating. While the intensification of globalisation may not be how future generations will judge these times, apprehension about the consequences of globalization is a popular concern in many countries, including New Zealand.

It is perhaps characteristic of this concern that the notion of globalisation is not well defined. It can mean many things, but one of the central notions is that individual countries are losing their autonomy of economic management, and as a result the public is worse off. The first view is surely ahistorical. Colonial New Zealand, trading in the international economy from virtually day one of European settlement, never had much autonomy. It may be contested whether New Zealand has ever had much autonomy, because it has always been an international trader and always dependent upon foreign capital. At times in the past, some parts of the economy were isolated from the rest of the world, but arguably this had the effect of further exposing the remaining sectors to the world economy.

The Economic Theory (in Brief)

The question of the extent to which globalisation makes some economies worse off is even more complicated. There is a well established economic theory which argues that, subject to some minor caveats which need not detain us here, the economy as a whole will be better off under a free trade regime, in which there is no government imposed restrictions to trade. “Better off” here means that there will be more material goods and services to share among the people in the country. However, that sharing may not actually occur, so that within a country some people may be worse off following the removal of protection while others better off. Those that lose are among those who protest at the removal.

Moreover, there are is the major caveat that the released resources (such as the workers in the protected firms) will be redeployed into other activities (including those which will increase exports). If unemployment rises, the country may not be better off. Of course the higher unemployment which has often occurred after the removal of New Zealand industry protection in recent years, may not be due to the specific anti-protectionist policies. In any case realistically there will be a period of transition in which the released resources are unemployed before they are redeployed. Economic theory provides little account of how long this period may be.

Nor does economic theory provide an estimate of the magnitude of the gains from free trade. When the actual potential gains are estimated they prove surprisingly small. For instance, estimates for New Zealand in the 1970s (using models based on precisely the economic theory alluded to earlier), the gains for total free trade were less than 1 percent of GDP, although protection was considerably higher than in the 1990s.

In any case the formal models usually assume that labour and capital are fixed. But a reality of the new world economy is that international investment flows are substantial and significant, while international migration may be greater than it was – say – a quarter of a century ago.

The Political Economy of Globalisation

It is worthwhile going through – albeit briefly – the limited conclusions of economic theory not only because the rhetoric suggests the gains are far greater than the theory or the evidence, but also because it poses the question that if the gains from trade are so small, why are the pressures to internationalise the economy so great? One answer is that there is some international conspiracy, or that the power elite of each country pursues globalisation because it is in its interests, although not in the interests of the rest of the population. However there are more realistic, if complex, explanations which are worth exploring. In particular, the globalisation phenomenon that we see in recent years is largely driven by technological changes which have changed the geography of the world, together with, secondarily, a converging of humankind’s interests and values.

We can see in the remains of dairy factors scattered through the Taranaki how technology undermines the local economy by making it interdependent with the regional economy. Fifty years ago there were a hundred or so factories each within a few tens of miles of one another, today there is but two – one in Waitara and the other in Hawera. What drove these changes? The sealed road and the motorised truck (the milk tanker) made it easier for the dairy farmer to deliver the milk further afield. At the same times larger dairy factories reaped economies of scale which made it worth each’s while to recruit milk from further away. Now dairy farmers were better off (since the lower costs of processing increased their return), but was the whole of Taranaki better off? Some workers had to travel further, some villages slowly died. Generally the change was slow enough, the region small enough, and people mobile enough for the communities to adapt to this provincial globalisation. Note too, that the communities may have even directly benefited from the transport change, since a wife could get a job in a place different to her husband who may also work some distance away from the house, while they may spend their evenings or weekends in a fourth place.

A more severe example of this change can be seen in terms of breweries, which were once scattered throughout the cities of the land. Today’s big four are found in Dunedin, Christchurch, Hastings and Auckland, again primarily as a result of the transport revolution combined with economies of scale in the production process. This time the closures are potentially more socially disruptive. It was not possible for the Wellington brewery worker to live in the same house and travel daily to the Hastings brewery after the Wellington one closed down. The worker could move, but that is likely to involve a significant social upheaval for the family. The difference between the dairy and brewery factory closures is that the workers are much less mobile over long distances. They may value the sealed road and the transport equipment that makes a holiday in the Hawkes Bay attractive, but that is likely to be an annual trek. Note how this time the benefits of the rationalisation are likely to go to consumers, in cheaper prices and better choice, as well as to the producer in higher profits.

(Some commentators of globalisation draw attention to boutique breweries which fill in niches the big ones can not. They exist because there are technologies not so dependent upon economies of scale and because of the growing heterogeneity of consumer choice. Certainly they generate jobs in the locality but it is also noteworthy that the boutiques do not expand into national and international businesses, nor do boutique manufacturers make up a sizeable part of employment in an industry, with the exception of fashionware.)

Suppose a major brewery was to move to Australia using increasingly cheap transport to supply the New Zealand market. Is that worse for the community which experiences the factory closure than if the business had gone to a distant part of New Zealand? One sort of answer might be that adjustment is usually slower across international boundaries than within nations. But, unlike the intra-national shift, the international relocation reduces the tax base of New Zealand (and increases the Australian tax base). Arguably this effect will be eliminated over time, as governments reduce taxation on producers as a competitive measure. In the long run the issue may reduce to the balance of job creation between the two nations. The assumption of full employment remains critical. (In the long run, labour market adjustment (migration) may resolve an imbalance – but as Maynard Keynes remarked “we are all dead in the long run.”)

However, even if these economic issues can be resolved there remains questions of national identity. New Zealanders are likely to be offended because the business leaves the shores, although the extent to which they are sufficiently offended to turn to consuming a higher cost domestic substitute puts an economic perspective on their indignation. This nationalism seems to be at the heart of the concerns about globalisation – why the shifting of activity offshore is seen to be much more troubling in proportion to regional or national rationalisations.

Note that in this account the changes are seen as a consequence of economic responses to technological change. The responses are intermediated by the profit seekers in the market, but it is far from clear that were there another economic mechanism the same phenomenon would not happen. Or rather if it did not happen, the resulting poor performance of the economy would not lead to its breakdown, as occurred with the COMECON economies a decades ago. Thus the globalisation is a consequence of the taking advantage of the technological change.

While the above illustrations involved gains from manufacturing scale and improved transport, in the last decade or so there have also been substantial potential gains from improvements in communications. Again a community need not make use of those gains – it could prohibit the provision of satellite news on television – the evidence is that as a rule they are reluctant to do so. Two important features of the communication revolution is that globalisation can now be applied to many of the service industries – even to knowledge itself (e.g. via the internet), and that it is possible to globalize business control in a way which was not possible in earlier times. (It may be possible that globalisation of political control is also increasing, except the impact of TV on the Vietnam and subsequent wars reminds us that there may be forces in the opposite direction.)

Additional to the technological changes have been fragmentation of social preferences. Communities seem more heterogeneous (or perhaps the heterogeneity is better recognised, or more easily expressed with affluence). This heterogeneity is expressed (among other ways) in the desires for goods and services, which appear to becoming increasingly fragmented, and more difficult to be supplied from a single (and hence in a small economy, local) plant. (A long time illustration in New Zealand is the preferences for a variety of motor vehicle marques and models, so that no local car assembly line has ever been able to achieve economies of scale.) This provides another reason for sourcing products from overseas.

Of course the increasingly heterogeneous communities still have commonalities. (Indeed the greater commonalities which appeared in the past may be an illusion. Was rugby ever a more dominant sport in New Zealand, or was it just presented that way by the ignoring of those who were not passionate about it?) One of these commonalities is a national identity, and that expression of an identity via state and economy, including ownership of common property and images. Thus the pressures to reap the technological opportunities that generate globalisation clash with the demands for community and national expression. Very often it is a clash between the macro and the micro. Many of those who publicly object strongly to the consequences of globalisation at the same time avail themselves of its benefits in their personal life: overseas travel, information sourced from overseas, foreign produced food, clothes, and computers, domestic transport dependent upon overseas imports, and so on.

In summary, the political economy argument is that there are technological changes which are driving globalisation, some of which are beneficial some of which are destructive. It becomes easy to identify the damaging elements and ignore the beneficial ones, or vice versa. In addition it is arguable that globalisation benefits some people rather than others. But again we need to be careful. Perhaps it is really the technological change which undermines some (especially workers with now obsolete skills, locations with now obsolete attractions). But that is a problem which goes back before the luddite cotton weavers. What is new is that the beneficiaries appear to be more likely to be offshore.

The Economic State in a Globalizing World

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

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

This seems to me to be overly pessimistic. But what it does indicate is that changes to the balance of funding government services may be necessary, especially by putting greater emphasis on user pays, user group pays, entitlements based on past contributions, and consumption taxes (rather than on factor incomes). Such changes will be resisted by traditionalists. Moreover and inevitably, there will some people who will be worse off from any rebalancing who, with their advocates, will also strongly complain (while those who are made better off are not as likely to be as vocal). It is not inevitable that the worse off will be the poorest, although any public debate is likely to focus on those among the poor who are worse off.

Much of New Zealand’s difficulties in debating such issues arises from the public prominence of the traditionalists on one hand and the right wing ideological extremists on the other. There are options between doing nothing (other than closing up the economy) and the sort of “trading naked” strategy which the extremists have advocated. (New Zealand’s propensity to strip away all interventions has been likened to someone at an picnic taking off all their clothes in the hope that others will follow. The punchline is the rest of the picnic looks at the naked one, and puts on another jersey.)

Certainly some policy instruments – increasing quotas and tariffs for instance – are becoming prohibited for international trade reasons, at least for a small economy. (Even large countries imposing border barriers are likely to be hauled in front of the WTO.) A positive conclusion may be that the policy issue is identifying new (effective) forms of industrial intervention. That seems to be the conclusion that the National Government came to after the eight plus years of lacklustre economic performance while it was in office. The mid-August 1999 “knowledge economy” package was a shift in that direction justified by the pure market not functioning well in the areas of science and technology and of education and training. It almost certainly presages a more interventionist approach in post economic policy after the election, whoever is government, although it will be a more cautious and disciplined intervention than that of the pre-1984 era. One factor which will force this is that bad policy which raises business costs or taxation without a compensating benefit will be punished in a globalized era, by migration of factors and businesses to less costly regimes.

Even so we can expect greater harmonization. Again there is a long history of this. There was grumbling when New Zealand metrified for international trade reasons (as the official statements clearly emphasize) but this was not seen to be a case against the globalization it was enhancing. Nevertheless the scope of the legal harmonization is increasing. For instance, today there is active discussion on the degree in which New Zealand should align its competition legislation with Australia. Part of the debate is which regime is more appropriate, but there is also a theme that there are advantages in having a broadly common regime. There is no compulsion to align the legislation. The issue is that of the benefits and costs of doing so. Even were New Zealand to adopt the Australian legislation in total, that would be a sovereign act, and at a later date a New Zealand government might choose another competitions policy regime. This applies for most other harmonization, although it may be increasingly expensive to abandon it.

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

Foreign Investment and Capital Flows

A strong theme in the agitation against globalization is the increasing ownership of New Zealand capital by foreign firms, and the rising New Zealand debt. Again this is not new. It would have been a parallel feature of much of the nineteenth century European economy.

It would be easy to argue that the issue is not of national ownership but of national control. Historically the foreign firm that built a factory in New Zealand to supply the local markets, was as dependent upon the New Zealand government as a native one. However it is widely believed that New Zealand has less economic control than it had in its recent past.

Partly it is a matter of magnitude. There is no comprehensive indicator of foreign ownership but as good as any is the income share of production classified as the property and entrepreneurial income to the rest of the world. In the early 1980s it amounted to (on a net basis after deducting the same income from the rest of the world to New Zealanders) between 3 and 4 percent of GDP (i.e. aggregate income). In the late 1990s the ratio was between 7 and 8 percent, or double that of fifteen years earlier. However the rise is largely a consequences of the savings and investment decisions of New Zealanders. Over the period domestic savings were insufficient to fund the capital investment the economy required, so businesses (and suppliers of domestic housing finance) went offshore to fill the increasing gap. It is a fundamental rule of finance that borrowers (individuals, businesses or states) lose their independence – their capacity to make independent decisions – to the extent they are in debt. If that extent rises, their capacity – their sovereignty – falls. Now it may be argued that New Zealand’s past borrowings were unwise – a view with which most future economic historians are likely to agree – but the problem is not of the foreign investment but of unwise domestic decisions.

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

Conclusion

However global financial markets may be overly liquid, and hence excessively volatile. New Zealand, like most debtor countries, no longer depends only upon foreign direct investment (i.e. in equity in businesses) to cover its savings gap. Much of the stock of foreign liabilities is in financial instruments which may be withdrawn at short notice (albeit at some cost to the lender). Thus the New Zealand financial system, and the economy which depends upon it, can be subject to substantial financial shocks. Although it has been New Zealanders who have one way or the other may the borrowing decision, and who have one way or another benefited from the funds that have been borrowed, in my opinion global liquidity is excessive, and potential detrimental to the global economy.

That raises the central dilemma which each country faces. The global economy is far from ideal, yet not to engage in it also has downsides. The theme of this chapter is that technological changes are increasingly integrating the economies of the world to the general benefit to those involved (but not to everyone who is involved). However it may be mismanaged at the international level (as illustrated by the dangerously high level of liquidity) and by each country involved (a proposition which probably true for New Zealand). The difficulty which confronts each economy is the how to relate to this imperfect situation. The choice is not of autarchy or even maintaining the current status quo (were that possible). Nor is it the extremism practised in New Zealand in recent years – the “trading naked” strategy. Getting a balance in between is difficult, especially for a small country which has so little influence.

The New Zealand critics of globalization confuse a number of different issues:
– the actual global arrangements compared with alternative (and possibly better) ones;
– the actual policies of New Zealand towards globalization (and other economic issues) compared with alternative (and possibly better) ones;
– the current losers from globalization compared with the gainers (and the portrayal of the losers as exclusively the poor and the gainers exclusively the rich).

In this confusion it is difficult to identify an alternative, other than one which addresses particular issues (such as protection for a car assembly plant) without examining the general consequences. Neither the uncritical anti-globalizers nor the uncritical pro-globalizers help much towards identifying the options which exist between the extremes. The result has been that New Zealand’s policy decisions have been much less effective than those of other countries (as evidenced by our poorer international trading performances).

Either approach compromises New Zealand’s sovereignty, although to be realistic we have little idea of what the long run sovereignty of nations may look like. With a few exceptions (England is one, unfortunately for Clarity of thinking in New Zealand which is so dependent upon images derived from English history), the nation state is a relatively recent development – a couple of centuries old. It may not last another two centuries. However the cultures which have underpinned the nation state are far older, and are likely to survive them. The notion that the world will end up as a grey cultural soup (based on Hollywood) seems unlikely, although it is possible that cultures may become detached directly from location, given the way that recent technologies are modifying the significance of geography.

New Zealand (and other economies) have some choice over the degree of their engagement in the world economy, although because each option has costs as well as benefit. Insofar as New Zealand can exercise this choice it retains its economic sovereignty. Yet by going into trading and other economic relationships its choice is reduced. A useful parallel with international trade is marriage. To enter into one involves some loss – even a permanent loss – of sovereignty. Yet such are the perceived benefits relative to the costs, that individuals get married, and they remained married even when it is evident to others that there are severe downsides in the arrangements). Thus it is with international trading relationships. The general benefits are judged to exceed the general costs. Similarly, New Zealand and other countries engage in the international economy.

The State Steps In: Michael Bassett Makes a Case for Intervention.

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

Listener: 14 August, 1999.

Keywords: Governance; Growth & Innovation; Political Economy & History;

Michael Bassett’s book The State in New Zealand 1840-1984 is an assiduous, if somewhat erratic, compilation of state economic activity in New Zealand, the result of burrowing through masses of archives from government economic departments. The picture he presents, up to 1984 anyway, is that the government of New Zealand actively promoted industrial development. On more than one occasion private initiatives were failing, and the state stepped in to assist a now successful business.

Bassett says that the book was written to prepare his account of the time when he was a member of a the Labour Government which stopped assisting industry (with the exception of the financial sector, on whom it lavished support). Yet, the book makes exactly the opposite case to the one Bassett’s government pursued. The history of the New Zealand economy is that of an extraordinary success over most of its life. As the book shows, that growth was accompanied by government intervention. Bassett cannot cite a time when government gave up getting involved with industry and the economy flourished. In 1930s and 1940s the economy grew at a similar rates to the Asian economies of the 1970s and 1980s. That was a period when intervention sharply increased under the first Labour Government.

It is true that the growth rate slowed down in the late 1960s to the mid 1970s, especially if invalid statistics are used. (Actually Bassett does not use the available data much. One would have thought that he would have found such statistics meat and drink for his history.) That is easily explained by the collapse in the structural terms of trade which devastated the vanguard growth industry of pastoral farming and processing. Once the transition to a more diversified economy was largely completed, New Zealand began to grow again, slightly faster than the average of other rich countries. What happens when a New Zealand government gives up assisting productive activity belongs to Bassett’s future book on the Fourth Labour. It will be a wonderful demonstration of the thesis Bassett is trying to reject. Hardly any industry assistance since 1984, hardly any industry growth.

The practical issue of intervention policy is not whether there should be any, but what sort of assistance. Robert Muldoon’s mistake was that his government’s involvement was too detailed. Current thinking is to support sectors and cross-sector inputs rather than firms.

An example of a cross-sector support is Research and Development. Electronic commerce is another looming challenge. My instinct is the government should be encouraging every New Zealand business to get on the net. Distance has always been a handicap to our new exporters. Why not create a cyberspace showroom which would exhibit all the goods and services New Zealand produces, so that potential foreign purchasers can see what we have from the comfort of their home terminal? Some businesses are already doing this. Lets get them all involved.

One of the first things that needs to be done is a review of the state and prospects of each sector. The resulting “Doomsday Book of Industry,” is likely to show a good chunk of them may be doomed if we continue as we are doing. Forward looking reviews were common up to 1984. The last great effort was under (then unknighted) Bill Birch. When he was Minister of National Development the identification of growth opportunities had to be done. A (dour) doer, rather than having an economic philosophy, Birch did it.

Out of the review will come growth prospects. The Irish Industries Development Agency’s priority sectors are: electronics; engineering; healthcare products, such as pharmaceuticals and medical devices; consumer products including sport, leisure and fashionware; financial services; and international services, including tele-services and software. (Note the order.) Our list will be different, but no doubt be as equally internationally outward looking.

Bassett’s book is valuable because we can learn from the past. Roger Douglas wrote in 1980 that “putting Government money into Tasman Pulp and Paper Company and New Zealand Steel was right. New industries were started that might not have been, because the private sector would not, or could not, do it.”

The Economic Context Of the Ministry Of Consumer Affairs

This entry was posted in Business & Finance on by .

Although this is an official paper of the Ministry of Consumer Affairs, I contributed to it. The full paper is on the Ministry of Consumer Affairs website. It is summarised as follows (August 1999)

Keywords Business & Finance

The microeconomic management of the New Zealand economy has changed markedly since 1984. Today there is much less direct intervention by government and a greater reliance on voluntary transactions in a market environment for which government actions provide a context. The Ministry of Consumer Affairs, established on 1 July 1986, is one of the agencies charged by government with administering this policy framework. This paper discusses the principles relevant to the discharge of the Ministry’’s economic responsibilities within the framework.

At the core of the economic changes in regulatory policy has been the political vision that voluntary transactions are preferable to transactions resulting from government directions. Economic theory provides guidance on how to ensure that the outcomes of voluntary transactions are efficient, in the sense of maximising aggregate material prosperity. (In economics, transactions encompass production activities.)

The underlying economic analysis that has influenced the changes in the regulatory environment over the last two decades derives from:
– the Marshallian partial equilibrium paradigm (named after British economist Alfred Marshall), which looks at transactions in a single market; and
– the Walrasian general equilibrium paradigm (named after French-Swiss economist Leon Walras), which looks at how markets interact.

From Marshall’s and Walras’s work are derived two key normative principles (known as the Marshallian-Walrasian normative principles):
– prices in an economy should include, whenever possible, the cost of all the resources involved in the transactions
– transactions should be left to private decisions, with a minimum of constraints on the participants.

There are a few exceptions, for defined social reasons, to the principle that transactions should be voluntary. However, the vast majority of transactions are left to individuals in a market context. Nonetheless, economists have long recognised that the Marshall-Walras account of economic transactions analysis is incomplete, insofar as it underplays the significance of transaction costs. In particular, different institutional arrangements lead to different transactions, different outcomes and different levels of overall economic efficiency.

Transaction costs include the costs of obtaining the information necessary for the transaction, the immediate costs involved in the transaction and the costs which arise as a consequence of the transaction, including monitoring, redress and enforcement (should the transaction subsequently ‘go wrong’). Transaction costs can be described as ‘the costs of running the economic system’ or ‘the friction in the economy’.

One approach to incorporating transaction costs into economic analysis derives from the pioneering work of British-American economist Ronald Coase. The normative principle associated with this work is called the ‘Coasian Normative Principle’ (CNP), which states that ‘interventions should be structured to remove impediments to voluntary transactions, especially by reducing transaction costs’
.
Insofar as the application of the Coasian Normative Principle is successful, market outcomes will conform more closely to those predicted by the Marshallian-Walrasian normative principles, with the beneficial consequences of efficient use of resources and higher material output.

An important means of implementing the Coasian Normative Principle is to provide a comprehensive legal framework, with well-defined property rights where those rights can be exercised at low cost. For example, one aim of consumer credit law is to reduce transaction costs, including information costs. This is to the ultimate benefit of all consumers and those who provide goods purchased on credit, as well as for reputable providers of credit.

Certain limited direct interventions may also have a role in reducing transaction costs. For instance, by having an authority ensure and enforce standards for weights and measures, consumers will be more confident about the terms of potential purchases and more willing to undertake the purchasing transaction.

Many of the economic activities of the Ministry of Consumer Affairs are concerned with the costs of transactions. Notably, different regulatory arrangements can have very different transaction costs. As a rule, the Ministry aims to minimise total transaction costs, to the benefit of both consumers and businesses. The Ministry might be said to be concerned with ‘providing oil’ to minimise the friction in the economic system.

A major objective of the Ministry of Consumer Affairs, in its policy advice and its operational activities, is to remove impediments to voluntary transactions and to minimise the costs of transactions between consumers and businesses.

For my own writings on the topic see
The Whimpering of the State, Chapter 20.

Kulturkampf: Commercialisation Wars Against Arts

This entry was posted in Governance, Listener, Literature and Culture on by .

Listener: 31 July, 1999.

Keywords: Governance; Literature and Culture;

What have the following in common?

* The disappearance of the National Art Gallery;
* National Archives sued by its stakeholders in the High Court;
* The public outcry over the National Library’s proposed reorganisation.
* The National Trust under severe financial pressure;
* Te Papa confused with an amusement arcade;
* Radio New Zealand’s considering privatising its news service;
* The lack of local content on television.
* User charge threats to your local library;
* Victoria University of Wellington selling off a McCahon painting?

The Beehive must privately bewail the public agitation, often from National’s friends. But from an economic perspective, they are the consequences of commercialisation policies spreading into the cultural sector.

Commercialisation is the theory that business practice is best, even for non-businesses. We have stacked the boards and the top executives of our cultural organizations with business men and women, and those tempted by the fashion. The general rule seems the appointees have to be ignorant of what they are in charge of (so as not to be captured by the special interest groups). Were there a Literary Fund (it got abolished), its chair would have to be illiterate.

Because the commercialisation policies failed in the core economy, there has been no marked increase in material output, and no additional revenue for cultural activities. But the commercialisation mythology says there would be efficiency gains from business management. Business performs best where it is selling things, and so the cultural organizations focused on selling – on user pays, on advertising, on sponsorship, on arcade games. This distorted their purpose, and yet failed to provide enough revenue. Internal reorganizations began.

The theory of the commercialisation has a crucial assumption that supply and demand are “separable”, so the production process independent of the demand for the good or service. That is a reasonable assumption for many – but not all – products. Organic food and free range eggs are exceptions. So is handcrafted pottery.

Much of what is produced within the public sector is not separable. Because the “output”, as the jargon goes, is not precisely defined, the only way of knowing the quality and suitability of its services involves an evaluation of the production process. You dont buy a car that way. You assess it by its final characteristics, knowing little about how it was produced. But the achievements of an archive, library, or museum are not like commercial products. We understand them largely by their supply process, even if the Public Finance Act requires portentous circumlocutory definitions. The business leadership takes the verbiage seriously, not understanding that mucking around with the production process affects what really matters. Before they are finished, the stakeholders are up in arms.

I was fascinated by Helen Clark saying that when she becomes prime minister, she will also take the cultural affairs and heritage portfolio. Perhaps she sees herself in the tradition of Peter Fraser and Norm Kirk who, while not formally holding the portfolio, were great ministers of cultural affairs. They knew it is not just about high culture. An extra 4 cents a New Zealander a day would give a useful $50m plus a year injection to the arts, reducing financial and commercialisation pressures on them. But I would give a third to the popular arts and a third to supporting the interests of the young.

National’s record has been spotty. Its ministers have generally treated the portfolio as unimportant, or have been, as in the case of current minister Marie Hasler, outside cabinet. The government’s Strategic Results Areas (now “Goals and Objectives”) have been dismissive of the arts – if they are even mentioned. Reflecting on his premiership, Jim Bolger regretted he did not do enough for the arts. There are National leaners who care as passionately about the arts as do those on the left.

What Has Happened in New Zealand to Income Distribution and Poverty Levels

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

Social Policy for the 21st Century: Justice and Responsibility Proceedings of the 1999 National Social Policy Conference, 21-23 July, 1999. Social Policy Research Centre Reports and Proceedings, 1999.

Keywords: Distributional Economics; Social Policy;

Introduction

In a recent article, the London Economist describes the “bad point” of New Zealand’s economic reforms which began in the mid 1980s as “a big increase in inequality.”1 In fact the New Zealand economy has generally had a poor growth performance, higher unemployment, and a worrying current account deficit ever since the reforms (although price levels have been more stable). Table 1 is a comparison between the overall economic performance of the Australian, New Zealand and OECD economies since 1985. There is no doubt the New Zealand economy has done worse. 2 Why this has happened, and why the New Zealand economic performance has been inferior to the Australian one, belongs elsewhere. For this paper, The Economist’s observation emphasizes just how widespread is the view that New Zealand has a more unequal income distribution, as a result of the policy changes of the last one and a half decades. But The Economist comment gives no sense of the magnitude of the increased inequality, nor its causes, which are the focus of this paper.

1.50.57.16.9

Table 1 – ECONOMIC PERFORMANCE: 1985-1998
NEW ZEALAND AUSTRALIA OECD*
Inflation Private Consumption Deflator (% p.a.)
1985 17.3 6.7 6.9
1998 1.3 1.9 3.3
Average (1985-1998) 4.6 4.1 5.5
Inflation GDP Deflator (% p.a.)
Average (1985-1998) 4.5 3.9 5.4
Unemployment (% of Labour Force)
1986 4.0 8.1 7.1
1998 8.2 8.1 6.5
Average (1986-1998) 7.2 8.6 6.6
Employment Growth (% p.a.)
Average (1985-1998) 0.8 1.9 1.2
GDP Volume Growth (% p.a.)
Average (1985-1998) 1.7 3.1 2.7
Labour Productivity Growth (% p.a.)
Average (1985-1998) 0.9 1.2
Terms of Trade Change (% p.a.)
Average (1985-1998) 0.9 -2.1
Export Volume Growth (% p.a.)
Average (1985-1998) 3.9
Import Volume Growth (% p.a.)
Average (1985-1998) 5.3 6.6 7.2
Current Account Deficit (% GDP)
Average (1985-1998) 3.7 4.8 0.2

OECD Economic Outlook, December 1998. The New Zealand figures do not always correspond to the official figures, but are used here for consistency. The OECD consists of 28 economies.
The 1998 data is estimated.

* G7 for unemployment.

The standard way in New Zealand to trace household income changes is to use household income reported in the Household Economic Survey, adjusted first to a disposable (after tax and benefit) income basis, and then adjusted for household composition using a household equivalence scale. There are difficulties with the resulting measures, but as far as is known the problems are not sufficiently strong to invalidate the results to be presented here. 3

A number of research teams have used this approach over the years. 4 There are two key studies. First, Mary Mowbray has provided estimates for the 12 available years between 1981/2 and 1995/6. 5 Second, and more recently, Statistics New Zealand (SNZ) has provided estimates for the four years 1981/2, 1985/6, 1990/1, and 1995/6. For a number of reasons the SNZ data might be expected to be more authoritative than the Mowbray (and other) studies. However it is not as comprehensive, so both are used here. In any case, all the studies tell broadly the same story.

Average Incomes

The equivalent disposable income of a household might be thought of as a sophisticated per capita measure of the household spending power, in which household economies of scales and differences between adults and children are allowed for.6 The Mowbray data is summarised in Figure 1 and Table 2. They show the mean income falling from $29200 (for a household of two in 1991 dollars) in 1982 to $25710 in 1994, and then recovering slightly to $29420 following the upswing to 1996, a gain of .06 percent p.a. over the 14 years. This pathetic figure is further evidence of the poor performance of the New Zealand economy over the period. In summary, over a 14 year period of reforms, the spending power of households has been stagnant.

The median income falls from $22402 in 1982 to $19680 in 1996 (an average fall of .92 percent p.a. over the period). The divergence between the mean and the median is an example of the increasing inequality of incomes. It means that the increase in inequality has not been simply a share shift from the poor to the rich, but a shift from the middle incomes to high incomes also. As a result those in the bottom 80 percent of the income distribution have experienced a fall in their real incomes over the period.

The Distribution of Income

TABLE 2: HOUSEHOLD EQUIVALENT DISPOSABLE INCOME
INCOME SHARES (percent) MARCH SURVEY YEARS
DECILES 82 84 86 88 89 90 91 92 93 94 95 96
Bottom 3.5 3.2 3.9 2.5 3.7 3.8 2.4 2.7 3.1 2.8 2.9 3.0
2 5.4 5.5 5.7 5.6 5.4 5.2 5.3 5.3 5.2 5.2 5.1 4.9
3 6.2 6.2 6.5 6.4 6.2 5.9 5.7 5.8 5.7 5.7 5.6 5.4
4 7.2 7.2 7.4 7.3 7.0 6.7 6.5 6.4 6.3 6.4 6.3 6.1
5 8.6 8.4 8.5 8.4 8.0 7.7 7.7 7.6 7.4 7.5 7.4 7.3
6 9.7 9.6 9.7 9.7 9.2 9.0 9.1 9.0 8.7 9.0 8.9 8.7
7 11.2 11.1 10.9 11.2 10.6 10.4 10.6 10.7 10.4 10.7 10.6 10.2
8 13.0 12.9 12.5 12.9 12.6 12.3 12.6 12.7 12.6 12.9 12.6 12.4
9 15.1 15.3 14.9 15.2 15.0 15.2 15.4 15.7 15.5 15.7 15.5 15.4
Top 20.1 20.5 20.1 20.8 22.3 23.9 24.8 24.1 25.1 24.2 25.2 26.8
DECILE AVERAGE ($1999 thousands) MARCH SURVEY YEARS
DECILES 82 84 86 88 89 90 91 92 93 94 95 96
Bottom 10.3 9.3 10.4 6.9 10.5 11.1 6.7 7.0 8.2 7.1 8.2 8.7
2 15.9 15.7 15.2 15.4 15.3 15.0 14.4 13.7 13.8 13.4 14.1 14.3
3 18.2 17.9 17.4 17.6 17.4 17.0 15.6 15.0 15.0 14.9 15.5 15.9
4 21.1 20.7 19.8 20.0 19.8 19.3 17.9 16.4 16.7 16.5 17.6 18.0
5 25.1 24.1 22.8 23.0 22.6 22.1 21.1 19.5 19.6 19.3 20.5 21.4
6 28.2 27.6 25.8 26.6 25.8 25.8 24.8 23.2 23.1 23.2 24.7 25.4
7 32.5 31.9 29.2 30.7 29.7 30.1 28.9 27.6 27.6 27.7 29.4 30.0
8 37.8 37.2 33.5 35.4 35.4 35.5 34.3 32.7 33.3 33.4 35.0 36.4
9 44.1 43.9 39.9 41.8 42.3 43.9 42.1 40.4 41.1 40.6 43.1 45.2
Top 58.5 58.9 53.7 57.2 62.8 69.0 67.7 61.9 66.6 62.6 70.0 78.8
MEDIAN 23.1 22.4 21.3 21.5 21.2 20.7 19.5 17.9 18.1 17.9 19.0 19.7
MEAN 29.2 28.7 26.8 27.5 28.2 28.9 27.3 25.7 26.5 25.9 27.8 29.4
RATIO 0.79 0.78 0.80 0.78 0.75 0.72 0.71 0.70 0.69 0.69 0.68 0.67
BELOW RCSS POVERTY LINE
11.7% 12.4% 12.5% 13.4% 12.3% 12.6% 14.6% 18.0% 17.3% 19.6% 14.9% 14.5%
GINI COEFFICIENT
0.26 0.26 0.25 0.26 0.28 0.30 0.31 0.30 0.32 0.31 0.32 0.32*

SOURCES: Mowbray (1993) plus update, except gini coefficients are from SNZ (1999) .
* 1997 = .033.

A common means of comparing changes in incomes over a period is to use the gini coefficient. A rise in the coefficient usually means there has been an increase in inequality. 7 The SNZ gini coefficient estimates are shown in Figure 2 and Table 3. There appears to be three phases. Between 1981/2 and 1987/8 (or possibly 1986/7) the gini coefficients are broadly constant indicative that the degree of inequality remained broadly constant too. The coefficients then rise sharply to 1990/1, from about .28 to .31. SNZ notes the increase is statistically significant. Afterwards, the inequality seems to rise more slowly up to .33 in a six year period. The standard deviation of the household distribution might be thought of increasing by just over a fifth to 1991, and by a half to 1997, compared to the what it was in the mid 1980s. 8

The picture from the gini coefficients is reinforced by Table 3 and Figure 3, which shows the household deciles. The top decile of households increases its share from 20.1 percent of total income in 1982 to 26.8 percent p.a. in 1996. The second decile holds its share (15.1 to 15.4 percent) and the remainder experience a decreasing share. Given that the average real disposable (equivalent) income hardly changed, we find that those in the top decile experienced a 34.8 percent in their spending power between 1982 and 1996 (equivalent to a 2.2 percent p.a.), the second to top decile experienced a 2.5 percent rise, and the remaining 80 percent had a 10.1 percent fall over the 14 year period. The bottom thirty percent have experienced an average fall of 12.6 percent, for the proportional reductions tend to be largest as one moves down the income distribution.

TABLE 3: HOUSEHOLD EQUIVALENT DISPOSABLE INCOME
INCOME SHARES (%) MARCH SURVEY YEARS
DECILES 1982 1986 1991 1996
Bottom 3.9 4.1 3.7 3.6
2 5.4 5.5 5.1 5.0
3 6.2 6.5 5.6 5.5
4 7.2 7.4 6.4 6.3
5 8.4 8.5 7.7 7.4
6 9.7 9.6 9.0 8.7
7 11.1 10.8 10.5 10.3
8 12.9 12.4 12.4 12.3
9 15.0 14.9 15.1 15.0
Top 20.1 20.3 24.3 25.8
DECILE AVERAGE ($1996 thousands)
Bottom 11900 12200 11600 11400
2 16700 16500 15900 15900
3 19200 19300 17400 17600
4 22300 22000 20000 19900
5 25900 25300 23800 23500
6 30000 28500 28000 27800
7 34300 32200 32600 32600
8 39800 37100 38700 39200
9 46500 44300 47000 47700
Top 62100 60500 75600 82200
MEDIAN 27800 27000 26000 25600
MEAN 30900 29800 31100 31800
RATIO 0.90 0.91 0.84 0.81

SOURCE: SNZ (1999)

Why the rise in inequality? First, observe the most rapid increase occurs in the period when the government is cutting the top income tax rate – it was 66 percent in the year to March 1986 and was 33 percent by 1990. This lifted the relative income of those in the top decile, who were the main beneficiaries of the tax cuts. This is sufficient to explain most of their income increase. In order to fund the reduction in income taxation on those at the top, the government cut social security benefits and other government spending (sometimes by the imposition of user charges), withdraw tax concessions, and allow income tax rates to rise on lower incomes via fiscal creep. 9 Since there was little income growth, the net effect of the fiscal changes was to switch income from the poor and those on middle incomes to the rich. 10

Thus far we have explained the increasing inequality by the deliberate actions of government taxation and spending decisions. Did the market economy, especially market liberalisation, also add to inequality? When I last did a comprehensive review I had only data up to 1993. I concluded that there was no evidence of an impact of market liberalisation on overall income inequality. I argued that the measures were so widespread they impacted on everyone, and so no part of the market income distribution especially benefited or suffered. Instead there was considerable turbulence within the distribution. 11

The addition of more recent data allows some reassessment. Inequality appears to have continued to increase after 1991, despite there being no major changes in the fiscal stance. While income tax cuts tended to favour middle incomes and families and benefit eligibility continued to be tightened, the changes were minor in comparison to the earlier changes. Because there are only a few observations it may be that the increase in the observed inequality is explicable in terms of statistical noise or the business cyclical, and there is really stability of income inequality. On the other hand, the trend increase is sufficiently perceptible to raise the possibility that, in contrast to before 1988, there is a systematic market mechanism which is increasing inequality. If there is it can be traced in the ratio of the median to the mean. Up to 1988 the ratio hovered in the .78 to .80 range. As we would expect, following the pro-rich fiscal measures, it fell to about .7 in 1992. But it appears to be continuing to fall, and was at .67 in 1996. Those who believe that more liberalised markets generate inequality have the current evidence on their side.

A table provided in the recent SNZ Incomes supports this conclusion. 12 If households are ranked my market income, there has been an increase in the share of market income of the top two deciles, and a corresponding fall in the share of the bottom seven deciles. Market income deciles do not simply relate to equivalent household income deciles, and the relationship changes over time. Nevertheless, the data is suggestive that, at the very least, rising unemployment has undermined the income of those in the lowest deciles. Unemployment was markedly higher in the mid 1990s compared to the mid 1980s – probably more than double when labour force participation rate changes are allowed for. It is also possible that there has been a widening in the dispersion of pay rates (especially at the very top of the distribution), and that changes in rates of return on investments are impacting on the income distribution, but neither is yet evident in the available data.

What Has Happened to Poverty?

Given that the real disposable (equivalent) incomes of the bottom three deciles have been falling, it might be thought unquestioned that poverty has been rising in New Zealand.

However there are some who contest this common sense. The most notable recent contribution is from Roger Kerr, the executive director of the Business Roundtable, which consists of the chief executives of the large corporations which have been both major advocates of the reforms and their largest (relative) beneficiaries. 13 In a recent paper he argued:

What does the [SNZ] study tell us about poverty, as opposed to changes in the distribution of incomes? Between 1982 and 1996, according to Statistics New Zealand, there was no increase in the proportion of individuals or households with an income of less than 50 or 60 percent of median disposable income. On the basis of these poverty benchmarks, between 6 percent and 12 percent of households were in poverty over the period.

These measures of poverty are similar to measures used by Stephens, Waldegrave and Frater.14 Using a benchmark of 60 percent of median disposable income, the latter found that the percentage of households in poverty fell from 13.7 percent to 10.8 percent between 1983/84 and 1992/93. At a benchmark of 50 percent, poverty was stable at 4.3 percent of households. The period examined did not reflect fully the economic recovery that started during 1991. Nevertheless, the study suggests that fewer households were in poverty than reported by Statistics New Zealand. Neither study suggests a rise in reported poverty since the reforms began.

The Statistics New Zealand study contradicts three claims that have frequently been made. First, the claim that the rich are getting richer while the poor are getting poorer is simply not true. People on high incomes have increased their share of total disposable income while middle income earners suffered a significant loss of income share. However, there was no significant change in the share of income of low?income households. (original’s italics)

The point here is not that Kerr is seriously misrepresenting the statistics (especial Statistics New Zealand, who do not even imply that 50 percent of the median is a poverty line). Rather he is using a poverty line indexed to the median, which as we have seen, has been falling relative to the mean. Consider the situation where the government takes income from those in the middle of the income distribution and gives it to the rich, without affecting the total income. The effect will be to depress the median, and hence the poverty line. Thus the numbers in poverty will fall according to the Kerr poverty line, even though they have had no change to their incomes, and inequality has increased.
There is a case for indexing the poverty line for changes in mean incomes in the long run. 15 However since average incomes have hardly changed, in practice a constant price poverty line is satisfactory for New Zealand analysis over this period.

Figure 5 and Table 2, report poverty levels if the standard (constant price) poverty line is used, based on the assessment of the 1972 Royal Commission on Social Security. It shows poverty rising slightly up to 1990, and then increasing dramatically in the early 1990s following the benefit cuts and the severe economic downturn. As the economy went into a cyclical upswing, poverty levels fell (probably as a result of increased labour market engagement), but still remaining above the level of the 1980s. The level depends on the precise poverty line, but the pattern remains broadly the same. In summary using the RCSS poverty line, poverty numbers inched up from 11.8 percent to 12.6 percent in the 1980s, rose dramatically to 19.6 percent in 1993, and by 1996 were 14.5 percent. If a constant price poverty line is used, poverty has definitely increased (and that would be also true were it were indexed to mean real incomes).

Kerr contradicts himself a little later, writing:

Relative poverty can only be reduced by raising the income of those who are judged to be in poverty at a faster rate than that of other groups. A doubling in everyone’s income, for example, would have no effect on the reported level of poverty according to a relative poverty standard.

An absolute income or expenditure threshold, on the other hand, focuses debate on the explicitly identified commodities and expenditure patterns that are necessary to avoid hardship. It is likely to show substantially less poverty than that reported in the studies discussed earlier. An absolute standard recognises that an increase in real income reduces poverty. This is simply common sense.

So Kerr has now switched to favouring an absolute standard for a poverty line. I will not rehearse the case for and against this view, with which every social policy analyst is familiar. The point is on page 3 of his speech Kerr relies on an indexed relative poverty line (plus some misreading of the statistics) for his argument. By page 5, he is opposed to an indexed poverty line, favouring a constant price one.

So while there is considerable agreement that the income distribution has got more unequal, it would have been less than comprehensive to have implied that there is a unanimous view on the course of poverty. Nevertheless real incomes have fallen at the lower end of the income distribution. Poverty must have risen on any commonsensical definition.

Go to top

Endnotes
1. 10 April, 1999.
2. B.H. Easton, The Commercialisation of New Zealand (Auckland University Press, 1997), p.142-7; B.H. Easton, In Stormy Seas: The Post-War New Zealand Economy (Otago University Press, 1997), p.257-8.
3. S. Carson & B.H. Easton, The Economic Status and Health Status Project, Paper to the 1999 conference of the New Zealand Statistical Association, July 1999.
4. M. Mowbray, Incomes Monitoring Report: 1981-1991 (Social Policy Agency, Wellington, 1993); V. Krishna, “Modest but Adequate: An Appraisal of Changing Household Income Circumstances in New Zealand”, Journal of Social Policy of New Zealand, Issue 4, July 1995 p.76-97; B.H. Easton, “Poverty in New Zealand: 1981-1993”, New Zealand Sociology, Vol. 10, No 2, November 1995, p.182-213; R. Stephens, C. Waldegrave, & P. Frater, “Measuring Poverty in New Zealand,” Social Policy Journal of New Zealand, Issue 5, December 1995, p.88-112; N. Podder & S. Chatterjee, Sharing the National Cake in Post Reform New Zealand: Income Inequality in terms of Income Sources, Paper presented to the New Zealand Association of Economists, 1998; Statistics New Zealand, Incomes: New Zealand Now, Wellington, 1999.
5. The 1995/6 year is for households who reported their previous year’s income between April 1995 and March 1996. This gives an average of the incomes for the year ended September 1995.
6. Indeed dividing by numbers of household inhabitants to give per capita income is using a crude household equivalence scale.
7. For the conclusion to be unambiguous the lorenz curves must not cross.
8. To convert gini coefficients into coefficients of variation see B.H. Easton, Income Distribution in New Zealand (NZIER Research Paper No 28, Wellington, 1983) p.33.
9. i.e. the effect of raising real taxes by not changing tax brackets for inflation.
10. An Australian audience is likely to ask what was the effect of GST. The research evidence suggests that GST did not in itself increase inequality. However, the resulting income tax cuts were skewed towards the rich, so the total package of GST plus income tax cuts increased inequality.
11. B.H. Easton, “Distribution”, in B. Silverstone, A. Bollard, & R. Lattimore (eds) A Study of Economic Reform: The Case of New Zealand, (North Holland, 1996).
12. Figure 4.9; page 60.
13. R. Kerr, Equalising Incomes or Reducing Poverty: Which Basis for Welfare Policies? (New Zealand Business Roundtable, 1999).
14. R. Stephens et al op. cit. (1995). See B.H. Easton, “Measuring Poverty: Some Problems” Social Policy Journal of New Zealand, 9, Nov 1997, p.171-180, for a commentary, and R. Stephens, C. Waldegrave, & P. Frater “Measuring Poverty: Some Rebuttals of Easton” Social Policy Journal of New Zealand, Issue 9, November 1997, p.181-185, for a reply.
15. B.H. Easton, “Poverty in New Zealand“: Five Years After, Paper for the Conference N.Z. Sociological Association, 1980; Easton (1995) op cit.

Go to top