Friday graph: New Zealand is well endowed

Another graph from Dr Don Elder, CEO Solid Energy.

Several points stand out.

One is that New Zealand is well endowed with coal and other minerals.  It would be folly not to sensibly exploit them.

Another is that the world is not going to run out of hydrocarbons any time soon.

A third is that it takes more than natural resources for a country to grow rich.  Saudi Arabia is not particularly wealthy: its per capita income is below New Zealand’s.

Institutions and policies (which New Zealand can improve) matter most for prosperity, but New Zealand also has abundant natural resources.  We have no excuses for not doing better.

Click to enlarge

New Zealand’s Great Regression

Luke Malpass, of the Centre for Independent Studies, has written a sobering, but informative and well-written, article about New Zealand for the Journal of the American Enterprise Institute. He summarises the current state of the economy, and political landscape, before examining how we got to this point – with a particular focus on the reforms of the 1980s and early ‘90s.

A colourful piece, it describes New Zealand variously as a ‘Polish shipyard’ and a ‘beacon of liberalizing reform’ (before suffering from) ‘stultification’ and ‘lost policy mojo’.

The article begins with an anecdote about Ruth Richardson giving the vote of thanks at the PJ O’Rourke dinner last year (excerpts):

Delivering the vote of thanks was the Honorable Ruth Richardson, New Zealand’s indomitable former minister of finance and author of the “mother of all budgets.” Richardson had effectively dismantled the welfare state and slashed government expenditure in the early 1990s before Prime Minister Helen Clark’s Labour government reverted New Zealand to type. In her speech, Richardson noted that since her tenure, New Zealand had “lost its policy mojo” and implied that her former party (the current conservative National-led government) was about to commit “fiscal child abuse.”

 The article argues that New Zealand never fully embraced ‘reform zealotry’:

New Zealand is not in a league of international political big hitters. There are few things that Americans would know about New Zealand: maybe the Lord of the Rings films, perhaps our anti-nuclear policy, or, for the politically minded, the liberalizing reforms of the 1980s (colloquially known as “Rogernomics,” after Minister of Finance Roger Douglas). These reforms ensured that from 1984 to 1993, New Zealand was a beacon of liberalizing reform (liberalizing in the classical sense, as I will use it here) to the rest of the Western world. In reality, despite its great results and international recognition, New Zealand’s overtly ideological and doctrinaire approach to reform was an anomaly in the nation’s otherwise pragmatic path. New Zealanders never really got into reform zealotry, and although the medicine was taken, the exercise regime that would make it unnecessary in the future required a bit too much discipline. It was easier to fall back into the old habits of tax, spend, and regulate.

And so it is. New Zealanders are pleased that Helengrad (the pop culture name for New Zealand under Prime Minister Clark, 1999–2008) has fallen and the socialist government gone. But the nation also seems relatively content with a conservative government doing the same socialist things with marginally lower income tax rates. John Key’s National-led government prefers not rocking the boat—he is keeping up entitlements and continuing to tax and spend, and to clamp down on incorrect social behaviors.

Luke Malpass identifies the ‘50s and ‘60s as New Zealand’s most prosperous years, but argues that years of protectionist policies would eventually make reform a necessity:

The 1950s and ’60s were New Zealand’s “golden years”—it had the highest living standards in the world in the 1950s, largely due to postwar export industries, particularly sheep products to the United Kingdom. But hidden behind this prosperity were the seeds of a long period of decline and a slow process of the stultification of society. The nation was complacent during the good times, and successive governments combined a “she’ll be right” attitude with a misguided belief in the long-term viability of protectionist policies. It took 40 years for the consequences to hit home.    

 Then he launches into his account of New Zealand’s renowned economic reforms:

When they did, the nation responded with radical reforms in 1984. From being one of the most closed-off economies in the world, New Zealand became one of the most liberalized. When the Fourth Labour Government was elected in 1984, almost every area of the economy except the stock market was heavily regulated with tariff and quota protection import licenses and the granting of monopolies. As part of its protectionist policies, government imposed a total wage and price freeze for almost two years in 1982. The government owned about half of the economy and provided cradle-to-the-grave welfare.

I would take issue with one or two points but Luke Malpass has done a well-articulated summary of a turbulent but hugely significant and fascinating period of our history. It continues from here and is well worth reading in full. Here’s the whole article.

Black or White: Good Cat is Mouse-Catching

This is an article I wrote for the ODT last week:

Black or White: Good Cat is Mouse-Catching

Some months ago the Sunday Star-Times organised a series of questions to put to the prime minister, John Key, and printed them along with his replies.

This was a worthwhile exercise in open democracy.

My question was along the following lines: “Your predecessor Helen Clark famously declared that the role of government is whatever the government defined it to be.  What is your idea of the proper role of government?”

Mr Key replied that his view was a pragmatic one: the government should do whatever works.

This was a good answer.  It reminded me of the Sichuan proverb: “black or white – good cat is mouse-catching”.  Deng Xiaoping, the Chinese leader who initiated China‘s moves away from a socialist system in the 1970s, adapted it to say that it didn’t matter whether the cat was black or white “as long as it can catch mice”.

Deng’s reforms certainly worked: in a generation they lifted more people out of poverty than ever before in human history.

I agree that public policy should be based on what works for prosperity, liberty and equity.  No one would argue that governments should adopt what doesn’t work.  Hence the need for evidence and analysis to inform policy: for so-called “evidence-based policy making”.

Economics is a discipline that can help inform policy choices.  It is fundamentally an empirical science.  There is no sense in which a policy can be correct in theory but wrong in practice: if the practice goes wrong, the theory is defective (as socialism demonstrated).

Free trade is an example of a policy that is ultimately justified more on practical than theoretical grounds.  To be sure, it rests on the fundamental economic principle of comparative advantage, but there are a number of theoretical arguments for departing from that principle: optimum tariff notions, strategic trade theory, infant industry arguments and the like.

As a matter of policy, however, the vast majority of professional economists put aside these theories as unworkable in practice and come down on the side of free trade.

A similar comment applies to business ownership.  The evidence is now compelling that – not always, but on average and over time – privately owned enterprises out-perform state-owned enterprises (and it is the general outcome that should inform sound public policy).  The reasons for better private sector performance have become well understood but the fundamental argument for privatisation is pragmatic: it generally works.

Likewise, there is a high level of agreement among economists about the potentially harmful effects of minimum wages.  In a paper last year on evidence-based policy-making, the chairman of the Australian Productivity Commission, Gary Banks, cited indigenous leader Noel Pearson (who is giving the Business Roundtable’s annual Sir Ronald Trotter Lecture in Auckland next month).

“[As Pearson affirmed], perhaps the most calamitous and tragic example of all was the extension of ‘equal wages’ to Aboriginal stockmen in the late 1960s.  Despite warnings by some at the time, this apparently well-motivated action led to the majority losing their jobs, driving them and their extended families into townships – ultimately subjecting them to the ravages of passive welfare.”

Of course, facts seldom speak for themselves – they have to be interpreted.  Everyone involved in the debate about public policy argues on the basis of some set of principles or ideas, whether or not they are conscious of them or make them explicit.

This is obviously true of the current government.  For example, the Confidence and Supply Agreement between the National and ACT parties recognises that a commitment “to limited government – government limited to its proper role” will need to be consistently adhered to if the 2025 goal of bridging the income gap with Australia is to be achieved.

‘Limited’ does not mean minimalist – or even necessarily small – government.  It means government focused on roles that economics teaches us governments need to undertake, such as the provision of genuine public goods and a social safety net.

Thus in some circumstances, high levels of spending on, say, national security (a public good) may well be justified.  But if governments go beyond such roles, economic growth and the well-being of the community is jeopardised.

A study for the Treasury suggested that a limited government criterion for public expenditure would normally point to a spending ratio of around 15% of GDP.  Even John Maynard Keynes thought government spending should be no more than 25% of a country’s GDP.  By comparison, government spending at all levels is currently running at around 45% of GDP in New Zealand.

Just as fat and lazy cats are not good mouse-catchers, over-extended and bloated governments are not good for economic growth and prosperity.

The 2025 Taskforce, which derives from the Confidence and Supply Agreement – with its emphasis on the importance of limited government – will no doubt be making that point when it reports later this month.


Australians Prefer First-Past-the-Post

An interesting poll here commissioned by the Institute of Public Affairs, a Melbourne thinktank.

The Newspoll survey finds that most Australians (57%) support a first-past-the-post (FPP) voting system compared with 37% who support Australia’s current preferential system.

Both systems are constituency-based compared with MMP, which is a proportional system – the make-up of parliament is essentially determined by the party vote.

Both FPP and a preferential voting (PV) system will be on the ballot paper for next year’s MMP referendum.  The two systems will also be the subject of a referendum next year in the United Kingdom.

PV can encourage strategic voting and is not necessarily an accurate reflection of voters’ preferences.  All voting systems have pros and cons.  The great political philosopher Karl Popper considered the key feature of a good democratic system was the ability it gave voters to throw out a government it disliked.  FPP does that decisively whereas PR systems like MMP don’t.

The full study is here

Friday graph: natural resources

This is an interesting graph from a presentation this week by Dr Don Elder, CEO of Solid Energy.

Many New Zealanders think Australia is ‘the lucky country’ because of its natural resources.

Dr Elder’s data suggest that New Zealand is actually ‘the luckiest country’ in terms of natural resources per capita.

The 2025 Taskforce in its report last year made it clear that Australia’s prosperity was not principally due to mining (although mining is obviously an important contributor).  Mining accounts for only 5% of Australian GDP and less than 2% of its workforce.  Australia has done well primarily because of its economic reforms that began in the mid-1980s.

By themselves, natural resources are not the key to prosperity – countries like Japan, Hong Kong and Singapore have few natural resources.  Similarly, resource-rich countries (eg in Africa and Latin America) are often poor.

The quality of a country’s institutions and policies matters most for prosperity.  But New Zealand would be foolish not to take sensible advantage of its natural resource endowment as highlighted by Dr Elder.

Click to enlarge

Teacher sacked for telling the truth

A British deputy principal has been sent home after she ‘exposed shocking failures in Britain’s broken school system’. I saw the clip (below) of Katherine Birbalsingh’s rousing speech and was impressed by her forthrightness and honesty.

The Daily Mail reports:

Katharine Birbalsingh won a standing ovation at the Conservative Party conference after she delivered a damning indictment of ‘utterly chaotic’ state schools.

But she was sent home from her school in Camberwell, South London, after her speech, and has now lost her job as a deputy head teacher at the inner city academy. 

Defiant Miss Birbalsingh, 37, insisted she did not regret her strongly worded attack, in which she said teachers were ‘blinded by leftist ideology’ and refused to admit they were failing children.

She said she was surprised by the response to the speech but added: ‘I don’t regret it, it had to be said. I’m pleased I did it. ‘It was never about me; it was about a school system that is fundamentally broken. I want people to take notice of what I’ve said and demand change.’

Teachers and students in New Zealand also suffer from the problems of a state-dominated system. Greater school choice and autonomy are badly needed including with employment arrangements. Good teachers are tarred with the PPTA’s brush over excessive wage demands, and held back by their collective refusal to contemplate performance-based pay. It would be nice to hear some speak out in a similar vein.

Here’s Katherine’s speech (hat tip: Steve Blizard):

Foreign investment in land

Labour have created quite a stir with their u-turn on foreign investment in land (remember 650,000ha of land was sold overseas under their stewardship), and other moves away from past policies, including some of those espoused by the last Labour government.

We always need to be aware of the tendency of political parties to adopt policies that may gain votes but are not in the overall public interest. The excerpt below from an unrelated letter to the New York Times at Café Hayek makes this point:

Public-choice scholars, such as my (now-retired) George Mason University colleagues James Buchanan and Gordon Tullock, have long argued that politicians’ vision never extends beyond the next election.  The consequence of this political myopia is that, contrary to popular myth, government is not uniquely concerned with the future; instead, politicians too frequently sacrifice the public’s long-run welfare in exchange for the cheap and irresponsible thrill of immediate victory at the polls.

Foreign investment in land is a highly emotive issue in New Zealand, but one that is often not properly understood. It recurs every few years. The last time was 2003: the Sunday-Star Times carried articles headlined ‘New Zealand for sale’, and ‘Land ownership strikes a nerve’. The government of the day introduced tighter rules for sales of ‘iconic’ land.

I wrote an article about this in the ODT a couple of weeks ago. The key points were:

  • New Zealand has a freely floating currency.  A foreigner wanting to acquire a New Zealand asset has to buy New Zealand dollars.  The New Zealand dollar seller will be paid in foreign currency, which will logically be used to acquire some other overseas asset (maybe a farm).  The country’s net asset position is unchanged.
  • For a given balance of payments position, more restrictive rules on purchases by foreigners of some class of asset (say land) will automatically mean greater foreign ownership of some other assets (eg businesses).  Are there sound grounds for biasing overseas investment in this way?
  • The factual position is that farmland sales approved since 2005 amount to 0.6% of total farmland and foreign investment in agriculture is just 1.6% of total foreign investment.
  • The benefits of foreign investment are several fold. It augments the supply of domestic capital available for investment and often brings with it managerial expertise, technology and links to markets.  Foreign investors employ New Zealanders and pay taxes. 
  • It is not as though New Zealand has a particularly liberal foreign investment regime.  The OECD has noted that New Zealand’s restrictions are above member country averages in most sectors.  Screening requirements in New Zealand are some of the highest among OECD countries. 
  • It has been argued that other countries restrict foreign ownership of land, but many, including Germany, France, the United Kingdom, Portugal, the Netherlands and Belgium, have no restrictions at all – they treat foreigners on the same basis as nationals. 
  • You can’t physically take land away, nor can you force any owner to sell to foreigners. The notion that ‘once land is gone it’s gone’ is incorrect. For example Carter Holt Harvey, with forest land interests, was majority owned by US company International Paper.  Then Graeme Hart bought it back (and has purchased land in many other countries). 
  • New Zealand is investing in agriculture abroad.  Fonterra and individual dairy farmers are investing in farms in China, India, Brazil and other countries.  New Zealand Farming Systems owned farms in Uruguay (now being onsold to Singaporean interests). Should other countries ban such New Zealand investment? 
  • If foreign investors are excluded, farmers wishing to sell may see their assets significantly devalued.  As prime minister John Key has noted, this could push some highly indebted dairy farmers into negative equity positions. 
  • Obviously there is a case for ensuring appropriate public access to places such as beaches, but this is a matter for regulation, not ownership.

The current government has a stated goal of catching Australia. Imposing tighter restrictions for non-economic reasons is not going to advance that goal. Let’s hope the debate focuses on the public’s long-run welfare and is not driven by anti-foreigner sentiment.