NO COUNTRY FOR YOUNG MEN (OR WOMEN)

It’s always salutary to see ourselves as others see us.

Recently German-born Centre for Independent Studies researcher Oliver Hartwich wrote this piece on alcohol.

The first sentence is arresting: “Coming from a country where even petrol stations are allowed to sell alcoholic drinks as ‘essential traveller needs’, I have always found Australian alcohol practices rather bizarre”.

Imagine the outcry over any proposal to allow petrol stations to sell alcohol in New Zealand.  Anti-alcohol crusaders like Doug Sellman would have apoplexy.

I have no view on such a proposal, but shouldn’t we be willing to examine evidence from Germany?  After all, New Zealanders routinely observe that European drinking habits are better than ours.

Dr Hartwich commends competition among supermarkets in the interests of driving down prices for consumers.  The idea of imposing minimum prices on alcohol products as a means of reducing alcohol abuse makes no sense.

Recently MP Paul Quinn exposed the hypocrisy of doctors appearing before the select committee considering liquor law issues.  They wanted to ban supermarket sales yet bought their own supplies from supermarkets.

As Dr Hartwich observes, restricting the places that sell alcohol is ineffective in preventing excessive alcohol consumption.  “Licensing laws in Victoria and the ACT are more liberal than in NSW.  However, binge drinking or alcoholism appears no worse in Melbourne or Canberra than in Sydney.”

Parliament is debating a proposal to increase the purchase age to 20.  This would align New Zealand with only 11 other countries.  Eighty-one (including Australia) have a minimum age of 18, 12 (including Belgium, Germany, Norway and Spain) set the age at 16, and 17 have no drinking age at all.

As one expatriate New Zealander said to me, the proposed move would do nothing to attract young expatriates back: it would be a signal that New Zealand is ‘no country for young men’ (or women).

Alcoholism and alcohol abuse are serious problems.  But as this submission by the Business Roundtable argued, heavy-handed regulation as proposed by the Law Commission is not the way to deal with them.

THE TRUTH ABOUT PRIVATISATION: BLOG # 8

Here is a presentation on partial privatisation given by economist Phil Barry to a well-attended meeting of the Law and Economics Association of New Zealand in Wellington on 21 March 2011.

Some interesting points include:

  • 2009 was a record year for privatisation globally
  • the international trend has been away from public floats and towards trade sales
  • the under-pricing of government floats has been much less in New Zealand than the global average
  • research indicates that the average gains from privatisation are large: 20% improvements in efficiency are reported, for example
  • most studies also find significant performance gains from partial privatisation
  • allowing foreign ownership increases the gains
  • the internal rate of return for the Crown’s investment in Air New Zealand has been just 4.1% p.a. to March 2011.

Phil Barry concludes that the government’s plans for partial privatisation are a step in the right direction.

EDUCATION VOUCHERS WORK

In 1992, Sweden introduced a major education reform whereby the government funds all schools – state and private, non-profit and for-profit – on the same basis.  You can call it an education voucher system, although that adds nothing to understanding it.

(Actually, the initial ‘voucher’ to non-government schools was somewhat less than to schools in the public sector.  Later, however, payments were equalised: as a Swedish minister said at a conference I attended in Stockholm a couple of years ago, “We believe in equality in Sweden!”)

Odd Eiken, the head of the Swedish education ministry at the time of the reforms, visited New Zealand as a guest of the Business Roundtable in the mid-1990s.

The reform has been an enormous success.  It is now supported by all political parties in Sweden except the communists.  Teachers and the teacher unions are also supportive.

The video below from Cato of Peje Emilsson, founder of the for-profit chain Kunskapsskolan, gives an excellent update on Swedish education.

Among the points he makes about the overall system are:

  • It is very easy to set up a new school
  • Schools cannot pick and choose students
  • They cannot charge additional fees but independent schools operate at lower cost than government schools
  • Enrolments in independent schools have grown from 1% in 1991 to 11% today.  At the upper secondary level 23% of students are in the independent sector and in parts of Stockholm the figure is as high as 50%
  • About 60% of the independent schools are for-profit companies
  • The independent schools are achieving better education results.  The results of the for-profit schools are better again
  • Competition has improved the performance of public schools
  • Kunskapsskolan combines technology and teacher involvement in new ways, putting students at the centre of learning
  • All the curriculum is on the computer, so that teachers have 27-30 hours a week with students compared with 20 hours (or sometimes only 10) in public schools
  • The company now has 10,000 students enrolled and employs about 800 teachers.  It is achieving about the best results in Sweden.

The Swedish system is not unique – the Netherlands, Denmark and Ireland have similar policies, and there are steadily expanding voucher programmes in the United States.  Australia has a more even playing field than New Zealand as far as independent schools are concerned.  Reports by an Inter-Party Working Group in 2009 recommended similar moves in New Zealand.

The experience of for-profit schools in Sweden is particularly interesting.  I have long thought that for-profit education may be the way of the future in the twenty-first century.  A thriving for-profit sector may hold out the best hope for revitalising teaching as a profession and allowing good teachers the opportunity to earn the rewards they deserve.

THE TRUTH ABOUT PRIVATISATION: BLOG # 7

You often hear the suggestion that if state-owned enterprises (SOEs) are sold, the government should limit shareholding to ‘Kiwi mums and dads’.

Putting aside arguments about the wider benefits of foreign investment, let’s look at the practicalities of this proposition.

Analysts calculate that the New Zealand share market as a whole is majority owned overseas, mainly by Australian institutions.

One estimate is that overseas shareholders account for about 60% of the market.  In the case of New Zealand’s largest listed company, Fletcher Building, the figure is around 58% (with half of that investment coming from Australia).

Why is this?  Quite simply because it would not be prudent for New Zealand investment funds and other institutions to have higher weightings. The additional risk outweighs the expected return.  Instead, funds need to be diversified across countries and asset classes.  Institutions are of course the major shareholders: in the case of Telecom, investors with shareholdings of 100,000 or more account for 92% of total shares issued.

You can see this pattern with the investment portfolio of the New Zealand Superannuation Fund, which is tasked with achieving competitive returns for a given level of risk.  As at 28 February 2011, the NZSF held just 5.1% of its assets in New Zealand equities.  By contrast it held 62.6% in global equities.

It follows that if the government were to attempt to restrict ownership in privatised (or partially privatised) SOEs to New Zealanders, the businesses would end up with a very distorted and more costly capital structure.  Moreover, restricting foreign ownership in certain asset classes (eg former SOEs) would mean higher foreign ownership of others.  Similarly, New Zealanders who increased their ownership of SOEs would have less invested in other New Zealand or foreign assets. Would there be any logic to that?

A likely implication of ownership restrictions is that the government would receive a lower price for the privatised assets.  Local institutions and investors would be forcibly exposed to idiosyncratic risk and so would require a higher expected return (discount rate) as compensation, whereas for foreigners the New Zealand asset risk would be at least partly independent of their home risks – and hence diversifiable – thus allowing a lower discount rate.

For example, the Commonwealth Bank of Australia reports funds under its management hold over 10% of Telecom’s shares, and depending on the trustee arrangements these holdings might well be reported as held by an overseas investor.  But thousands of New Zealanders have an ownership interest in these shares through superannuation and other funds managed by CBA.

One could even take the argument further and suggest that taxpayers as current owners of SOEs are exposed to undue risk.  On average they already have most of their assets in New Zealand (in the form of housing) and are dependent on New Zealand sources for wages and other incomes. If New Zealanders are not willing to own entire SOEs voluntarily, because the return does not justify the risk, why should the government force them to do so by investing in SOEs on their behalf, either directly or through the NZSF?

If we look at our external accounts, foreign equity investment in New Zealand is barely higher than New Zealand equity investment abroad.  The difference is that foreigners tend to invest directly in large stakes (which are visible) whereas New Zealanders hold mostly portfolio investments in securities markets. In both cases these transactions are welfare-enhancing for New Zealanders: outward investment because it diversifies portfolios; inward investment because foreigners have paid more than locals were prepared to.

New Zealanders would be most unhappy if they lost a large chunk of their retirement savings due to concentration in a single market.  (The foreign exchange element of investing abroad is easily hedged.)

So the message for those who want to restrict shareholding in privatised SOEs to ‘Kiwi mums and dads’ is: be careful what you wish for (if you really have their interests at heart).

FRIDAY GRAPH: IRELAND’S BEST HOPE FOR RECOVERY

This graph illustrates Ireland’s best hope for recovering from its current crisis.

The Celtic Tiger boomed in the 1990s with economic liberalisation.  It rose in the economic freedom index of the Heritage Foundation and the Wall Street Journal to rank as the freest economy after Hong Kong and Singapore.  Notions that its economic success was due to EU subsidies and interventionist industry policies were misplaced.

Policy errors combined with the unsuitability of EU monetary policy for an overheating economy contributed to the property bubble, bank failures and the debt crisis of recent years.  However, Ireland stands a better chance of recovery than some other highly indebted European economies.

Internal devaluation is already working, export growth is strong, and the government has taken tough decisions, including cuts of 10 percent to public sector payrolls.

The biggest risk remains the possible need for further recapitalisation of Ireland’s banks and associated sovereign debt burdens.

The challenge for Ireland is to return to the principles of the Celtic Tiger and achieve growth rates in the next few years that will see its debt levels peak and reverse.

Ireland’s tigerish dynamics – liberalised, young, productive and hi-tech!

Click on the graph to enlarge.

Source: OECD, Eurostat, CBI, Datastream

PPPs: DO THEY WORK?

Here is an excellent, balanced article on public-private partnerships by economic consultant, Phil Barry of Taylor Duignan Barry Ltd.

He is the author of the report The Changing Balance Between The Public And Private Sectors commissioned by the Business Roundtable.

The article notes that:

More than 90 countries are now using PPPs in areas as diverse as designing and building roads and schools, constructing and running prisons, and designing, building and operating water and wastewater treatment facilities.  Amongst the most active countries using PPPs have been the United Kingdom, Australia and Canada, countries we have much in common with.

But do PPPs work?  Here is Phil Barry’s assessment:

The formal studies that have been undertaken generally provide a qualified “yes” to that question. I say qualified because the PPPs don’t always work. And even when they do work, the PPPs are by no means perfect.

A study by the UK National Audit Office (refer the table below) provided one of the most comprehensive independent evaluations of PPPs. That study found PPPs had their flaws: of the 37 PPP projects evaluated, 9 of the projects (24%) were late and the projects incurred cost-overruns, on average, of 22%. But the experience in the public sector was a lot worse: 70% of the projects were delivered late and the cost overruns averaged 73%.

A comparison of PPPs and conventional public sector performance
 

PPP performance

Public sector performance
Cost overruns

22%

73%

Delay in project delivery

24%

70%

Source: UK National Audit Office

Some people think PPPs have failed because private investors have gone belly up.  But this is just a normal business risk that they should bear.  As the article notes:

There have been some high-profile collapses of companies involved in PPPs in Australia in recent years. For example, the consortium behind the Cross-City Tunnel underneath central Sydney went bankrupt, largely because of its over-optimistic projections of traffic volumes. Much the same happened with the Brisbane and Sydney airport rail links.  Does that mean the PPPs failed? There was no loss of service – the tunnel and rail links remained open – and the taxpayer didn’t lose out. Those who lost their money were the private investors who took the risk. Another road PPP, Melbourne’s Citylink freeway, has been highly successful, and when there were problems with one of the tunnels the entire rectification cost was borne by private parties with no call on taxpayers.

Phil Barry debunks the old canard that PPPs are not appropriate because the government can finance the project more cheaply:

Certainly the government can almost always borrow more cheaply than the private sector. But that doesn’t mean the government should necessarily finance a project. If that logic was correct, the government would end up funding all the riskiest activities in the economy. Why not have the government fund property development or own football teams if all that mattered was access to cheap finance?  Higher private sector rates allow for risk, but the true cost of government borrowing is higher than it appears – the risk element is often only recognised when taxpayers end up bailing out unsuccessful projects.

The article notes the relevance of PPPs to the social sector.  A case in point is the recommendation of the recent Welfare Working Group that much of the job placement role of Work and Income New Zealand should be outsourced to the private (voluntary and for-profit) sector.

It concludes with a comment on the relevance of PPPs to the Christchurch earthquake recovery effort.  They are an obvious source of capital for replacement infrastructure.

LESSONS FROM SINGAPORE

This week’s issue of The Economist contains an important special report by one of the paper’s most talented journalists, John Micklethwaite, on the role and size of the state.

He concludes that the prospects for reforming the state have improved with the fiscal crises buffeting Western nations:

… the incremental benefits of ever bigger government, even assuming it was somehow affordable, become ever smaller.  Decent-sized government can reduce inequality and poverty, but most of the evidence is that gargantuan government merely gets in the way of social progress.  A state that takes up more than half the economy begins to deliver an ever worse deal to ever more people in the middle: the extra benefits become harder to detect, the extra costs harder to hide.

The report argues that with good management the share of government spending in Britain could be reduced to 40% of GDP – a very modest goal and an outcome that would still be far too high for fast growth.

It rightly notes that the British welfare state, with high levels of social transfers and middle class churning, would remain twice the size of Singapore’s.  Unusually, for what is still a Eurocentric paper, the report devotes this section (scroll down) to observations about Asia and Singapore in particular.

Singapore is certainly a standout country.  Only two generations ago Orchard Road looked like a third world thoroughfare.  In the 1970s I was involved with the administration of New Zealand aid to Singapore.

Today, Singapore’s per capita income (PPP basis) according to World Bank figures is US$47,940, roughly on a par with Hong Kong ($43,960), well ahead of Australia ($34,040) and nearly twice that of New Zealand ($25,090).

Some New Zealanders think of Singapore as a country that reflects the state paternalism of Lee Kuan Yew who ran the island from 1959 to 1990.  It is true that there are dirigiste elements in the Singapore model, such as mandatory contributions to the Central Provident Fund which finances  much of Singaporeans’ housing, pensions and health care.  Also some outsiders dislike Singapore’s limited political democracy, proselytising of ‘Asian values’ and attitudes that they find somewhat stifling, including of entrepreneurial vigour.

But to regard Singapore as an essentially statist country is to miss the wood for the trees.  It consistently rates behind Hong Kong as having the freest economy in the world.  As Micklethwaite notes, Singapore’s success owes far more to laissez-faire than to industrial policy:

Rather than seeing foreign investment as a way to steal technology or to build up strategic industries, as China often does, Singapore has followed an open-door policy, building an environment where businesses want to be. The central message has remained much the same for decades: come to us and you will get excellent infrastructure, a well-educated workforce, open trade routes, the rule of law and low taxes.

Government spending is around 19% of GDP, the top income tax rate is 20%, the top corporate rate is 17%, Singapore has been at free trade for years, and its labour market is highly flexible with no burdensome rules on dismissals and work hours.

Many other interesting features are noted by Micklethwaite:

  • Singapore’s competitive advantage has been good, cheap government
  • It provides better schools and hospitals and safer streets than most Western countries
  • It is near to the top of educational league tables, yet education consumes only 3.3% of GDP (less than half New Zealand’s level of education spending)
  • Teachers need to have finished in the top third of their class; headmasters are often appointed in their 30s and rewarded with merit pay if they do well but moved on quickly if their schools underperform
  • The quality of Singapore’s civil service is exceptional, with those at the top being paid US$2 million or more
  • There is a welfare safety net to cover the very poor and sick, but much greater reliance on personal and family resources.  Lee Kuan Yew once said that the only thing that would hold Singapore back would be the development of a Western welfare state.

Micklethwaite concludes:

… arguably the place that should be learning most from Singapore is the West. For all the talk about Asian values, Singapore is a pretty Western place. Its model, such as it is, combines elements of Victorian self-reliance and American management theory. The West could take in a lot of both without sacrificing any liberty. Why not sack poor teachers or pay good civil servants more? And do Western welfare states have to be quite so buffet-like?

By the same token, Singapore’s government could surely relax its grip somewhat without sacrificing efficiency. That might help it find a little more of the entrepreneurial vim it craves.

Neither Hong Kong nor Singapore have significant natural resources.  Their geographical position has not altered: Hong Kong grew rich while China was still poor.  They do not have great natural environments but there’s not much they can do about that.  Their prosperity underlines the lesson that the institutions and policies a country adopts basically determine its success in the modern world.  Singapore has an admirable focus on its own interests; one hears little about ‘leading the world’ on climate change, for example.

Many New Zealanders are sceptical about the idea that New Zealand could catch up with Australian living standards.  I have put the question the other way round: would any competent economist not think that New Zealand could overtake Australia if it moved towards the kind of economic framework of Hong Kong and Singapore?  So far none has come forward to take this position.