Here is a striking comparison of New Zealand and Australian economic performance from the recent OECD economic survey of New Zealand.

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The OECD comments: 

The global financial crisis has probably resulted in a permanent reduction in most OECD countries’ potential output, in part due to capital decumulation, and it may have also led to a rise in structural unemployment, possible hysteresis in labour supply and a fall in total factor productivity…  In New Zealand, however, potential growth as estimated by the OECD had started to decline well in advance of the crisis, starting around 2003 (Figure 1.5).

The New Zealand chart illustrates both the huge improvement in economic performance following  the economic reforms of the 1980s and early 1990s and the dramatic deterioration, from as early as 2003, with the failed policies of the last Labour government.



Recently the Treasury released a December 2010 paper Short History of Post-Privatisation in New Zealand, written by John Wilson, an experienced former Treasury official.

It records in a balanced and objective way the history of nine major privatisations by central and local governments.  The companies surveyed are Ports of Auckland, Bank of New Zealand, Air New Zealand, Auckland International Airport, Telecom, Tranz Rail, Trustpower, Contact Energy and the Forestry Corporation.

The paper notes that

The selection of companies was intended to illustrate the issues that have arisen from privatisation. The list of companies is not comprehensive, nor is it necessarily a sufficiently robustly drawn sample to draw strong aggregate conclusions about privatisation in New Zealand. The strongest general conclusions about the merits of private rather than government ownership can be drawn from global studies with much bigger samples.

Not covered are many of the other 20 plus privatisations that would generally be regarded as successful, such as NZ Steel, Petrocorp, Postbank, Rural Bank, State Insurance, Works Development Services and Capital Property Services.

The paper notes the range of objectives of privatisation of governments around the world:

  • Putting businesses under the full pressures of private capital markets, and thus making them more efficient.
  • Reducing the exposure of the government balance sheet to risky debt financed assets.
  • Removing the capacity of the businesses to seek government aid in bad times, thus both promoting better business management (to avoid that risk) and reducing risks to government fiscal outcomes.
  • Promoting the development of local capital markets, and/or encouraging a broad ownership of shares in the community.
  • Using the sale proceeds for higher priorities, typically to reduce government debt.

All of these objectives have been relevant at different times in New Zealand.

On methods of privatisation, the paper comments:

Typically, in an asset sale, the best price is obtained by selling a controlling shareholding to a single entity that can control the destiny of the business (a trade sale). A float generally gets a lower price.

New Zealand governments mainly employed trade sales, with some floats or sell-downs.  Privatisation was not ‘done the wrong way’, as some critics allege.

The paper makes a key point on how to judge privatisation:

The outcomes for the individual companies dealt with here vary a great deal. Some have prospered and greatly rewarded their shareholders; others have gone into financial distress and some of those have required government finance again. It is probably unfair to see both of these ends of the spectrum as indicative of failed privatisation. In any group of companies over two decades, some will prosper and some will fail. That is in the nature of a competitive economy.

Interesting points made on the nine privatised companies are as follows:

Ports of Auckland

Partial privatisation achieved significant efficiency gains.  “For example between 1988 and 1993 staff numbers fell from 1393 to 504, and average turnaround times fell from 38.4 to 15.7 hours.”  The point is not made that after renationalisation the financial performance of POA fell away and the partially listed company Port of Tauranga has outstripped POA in terms of productivity gains.

Bank of New Zealand

The main takeaway here is a cautionary note about partial privatisation: “the period of mixed ownership of the BNZ was not a success.”

Air New Zealand

The paper records the lessons of Air New Zealand as follows:

It was private investors, rather than the government, who lost money as a result of Air NewZealand’s financial failure.

The Ansett purchase was a major strategic failure. It does not disprove the general principle that private ownership is more commercially adept than government ownership. But it reminds us it is a general principle rather than an iron law.

The paper is wrong to state that since (partial) renationalisation “the commercial performance of Air New Zealand has been good.”  As noted in an earlier blog (1 February 2011), Air New Zealand has not systematically met its cost of capital.

Auckland International Airport

There has been little controversy about this privatisation (other than the previous government’s misguided intervention in an overseas bid for a stake in the company).  As the paper notes, “AIA has become one of the major and respected companies on the NZX, and it retains a wide shareholding.”


The paper states:

Telecom’s post-privatisation performance divides, on the face of it, into two periods. For the first five years or so the value of the company rose quickly, as reflected in its share price, and although that led to some critics arguing that it had been sold too cheaply, the public  also appreciated both Telecom’s improved service compared to the memory of the Post Office, and the new competition from Bell South and Clear.  Subsequently, as Telecom’s share price has fallen back to near the original float level, criticism of the original sale price has dissipated.

It does not go into the previous government’s politically motivated unbundling of Telecom, contrary to the advice of the Telecommunications Commissioner.  This was an unprincipled regulatory taking without compensation to Telecom shareholders which crippled the company and has led inexorably to further intervention, in particular taxpayer investment in broadband.

Tranz Rail

The key points here are that under private ownership cost reductions occurred and returns on capital improved, but the business was still not financially viable in the face of continuing declines in competing freight costs.  Rail is a very difficult business in New Zealand.  The paper notes:

Nonetheless, privatisation meant that for 10 years from 1993 to 2003 the Crown did not have to fund the rail freight system. That is quite likely the only such decade since rail came under central government control in the 19th century.


As an integrated commercial asset rail is probably worthless now, though elements of it (for example the ferries; the West Coast coal route) would still have value in a break-up. The price paid by the government in 2008 reflected essentially a non-commercial transaction.

In other words, the Labour government paid an exorbitant price to buy back rail for political reasons, and taxpayers are now saddled with a business that loses “at least $100 million a year”.  Bill English has rightly described this as the price of nostalgia.

Trustpower and Contact Energy

Both have been success stories since partial and full privatisation respectively.

Forestry Corporation

The paper notes:

The FCNZ sale was a success, but not for reasons that were expected at the time. It shifted the write-down of forest assets as a result of the 1998 Asian crisis from the Crown to Fletcher Challenge and its consortium partners. Clearly in this case the price received for the asset was, with hindsight, excellent.

Contrary to claims that ‘family silver’ was sold too cheaply, Fletcher Challenge clearly paid too much for this business.


Three final points in the paper are worth noting:

  • The privatised companies have followed very different paths, and the level of commercial success they have achieved has varied greatly. That should not surprise us. That is how an economy made up of competing private businesses functions.
  • Five of the companies under discussion that remain listed on the NZX (Auckland Airport, Air New Zealand, Contact, Telecom, Trustpower) make up over a third of the market capitalisation of the NZX50.
  • The privatisation programme of the 1980s and 1990s is one of the factors behind New Zealand entering the recent financial turmoil with a relatively modest level of government debt.



How often have you heard the claim that incomes in the United States have been stagnant for “decades”?

The chart below from the Pew Economic Mobility Project shows otherwise.

It is true that the top 20 percent in the United States today earns more than the top 20 percent earned in 1970.  But comparing quintiles across time doesn’t tell us what happens to actual people.

The chart shows what happens when you compare the incomes of parents (1967-71) with those of their children (1995-2002): The children of all earners except those in the top 20 percent saw their incomes improve over those of their parents. The children of earners starting in the bottom 20 percent saw the biggest increase over their parents’ incomes.

This excellent paper The Inequity of the Progressive Income Tax sheds more light on this issue.  The author, Kip Hagopian, writes:

In addition to America’s substantial superiority in gdp per capita (which is a measure of the performance of the economy without regard to how income is distributed), the US. has a much higher standard of living than virtually all of the most advanced European and Asian countries. According to Luxembourg income  study (which uses a very comprehensive measure of income) median disposable personal income in the US. In 2002 was: 19.3 percent higher than Canada; 68 percent higher than Finland; 45 percent higher than Germany; 59 percent higher than Italy; 31 percent higher than Norway (despite its vast oil and gas wealth); 73 percent higher than Sweden; and 31 percent higher than the United Kingdom. It should be noted that the figures for GDP per capita and median income understate America’s advantage because the median age of America’s population (about 36.8 years) is about four years lower than the average of the median ages in Western Europe and almost eight years younger than Japan. Age (a proxy for experience) is one of the most significant contributors to income and is also, therefore, one of the most significant contributors to income inequality. In addition to higher median incomes, Americans have higher median net worths, which add further to the standard of living differential.

Hagopian goes on to say:

Another common claim is that incomes in the U.S.have been stagnant for “decades.” But this claim is at odds with data from the Congressional Budget Office, which uses a measure of household income that, like the Luxembourg measure, is quite comprehensive, taking into account transfer payments, health and retirement benefits, profits from retirement accounts, imputed interest on owner occupied homes, differences in household size, and taxes paid. Using this more meaningful definition of income, from 1983 to 2005 real median household income in the U.S.rose by 35 percent, which can hardly be considered “stagnant.”

Have a look too at the parable at the beginning of the article on tax principles.  It’s brilliant.


Here’s a video (hat tip: Mark Perry) about innovative local government in the United States. Sandy Springs, Georgia, a town of around 100,000 (so comparable to Hamilton, Tauranga or Dunedin) has outsourced all of its functions except for fire and police.  Since incorporating in 2005, Sandy Springs has improved its services, invested tens of millions of dollars in infrastructure, has no long-term liabilities and has kept taxes flat. Why wouldn’t councils in New Zealand want to consider this option?

Government Size And Economic Growth

My reading of Treasury material in the last decade on whether high government spending harms economic growth is that size doesn’t matter in its view – the public sector can in principle spend taxpayers’ money as well as they can spend it themselves.

This view implicitly holds that the government is not constrained by problems of information and incentives.  Therefore if there is a problem it is only because not enough is being spent on ‘productive’ categories of spending and too much on ‘unproductive’ categories.  Treasury papers have also been at pains to make the trite observations that government spending can be too low as well as too high, and that the quality of spending matters, which of course it does.

Treasury has never engaged with a point the Business Roundtable has made countless times, namely that no OECD country with government spending over 40 percent of GDP has achieved sustained annual per capita GDP growth of 4 percent or more – the kind of growth rate necessary if New Zealand is to climb back to the top half of the OECD income range (the last Labour government’s goal) or to catch up to Australian income levels by 2025 (the current government’s goal).

This month the Treasury has released the paper Government and economic growth: Does size matter?  It is a slight advance on previous efforts.

In its two reports to date, the 2025 Taskforce has been in no doubt that the answer to this question is ‘yes’.  It said in its first report:

Our judgement, informed by a reading of the international historical experience, is that it would be almost impossible to achieve the sort of sustained transformation of our growth performance with the size of government at current levels (around 45 percent of GDP).

In its latest paper the Treasury still cannot bring itself to endorse this obvious conclusion.

The Treasury paper appears to be poorly researched.  For example, it does not cite a 2010 book by Andreas Bergh and Magnus Hendrekson on the very same topic, Government Size and Implications for Economic Growth.  The key conclusion of these authors is that in rich countries, a 10 percentage points increase in tax revenue as a share of GDP (say from 30 to 40 percent) leads to annual economic growth being between one half and one percentage point lower – a large reduction.

Even more curiously, the paper does not cite the study How Much Government: The Effects of High Government Spending on Economic Performance published by the Business Roundtable.  The author was Winton Bates, previously a senior official in the Australian Productivity Commission, a consultant at the New Zealand Treasury, and an adviser to the 2025 Taskforce.  Bates’ “conservative” estimate was that “a reduction in government spending from 40 to 30 percent of GDP could be expected to add about 0.5 percent to the rate of growth of GDP over about a decade.”

A subsequent Business Roundtable study by Bryce Wilkinson Restraining Leviathan, which had much to say on the subject, is also not cited.

Nor, when it comes to discussing public sector productivity, did the paper cite the Business Roundtable study overseen by former Treasury secretary Graham Scott, Productivity Performance of New Zealand Public Hospitals 1998/99 to 2005/06, authored by Mani Maniparathy.  It concluded, among other things, that overall productivity of personnel in public hospitals actually decreased by 8 percent in the five years to 2005/06.

The paper even fails to note research that the Treasury commissioned itself from Australian economist Ted Sieper which argued that the provision of public goods and a modest safety net  in New Zealand would require government spending of no more than 14-15 percent of GDP.

The following table from the 2025 Taskforce’s second report shows that this is not an unreasonable estimate.  Government spending today is as high as it is largely because of the level of government spending on ‘social assistance’.  Much of this spending presumes that governments can spend taxpayers’ money on health, education and welfare services better than individuals and households.   This presumption took over the Western world around the 1960s, as has been documented by Tanzi and Schuknecht. It is dubious to say the least.

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Furthermore, the Treasury’s examination of the ways in which government spending may harm growth is much too narrow.  Winton Bates noted that “Big government adversely affects economic performance in many different ways”, and listed some as follows:

  • When the range of services provided by the government extends into areas where it has no competitive advantage the cost of services tends to increase.
  • High levels of government spending on goods and services (including public sector employment) often involve waste of resources.
  • Excessive regulation imposes large compliance costs on businesses and individuals.
  • Attempts to regulate the macro economy using counter-cyclical fiscal policies do not necessarily have intended effects and may lead to worse economic outcomes over the longer term.
  • Redistribution of income has adverse effects on the incentives of the intended beneficiaries, including possible changes in norms of behaviour leading to greater welfare dependency.
  • Increases in government spending tend to encourage wasteful lobbying activities by suggesting to interest groups that governments are likely to be responsive to their pressures.  As a result, much government spending – in areas such as health, education and retirement incomes – provides private goods for the benefit of middle-income families and is funded by the same people. Such government funding of private goods displaces more efficient private arrangements.
  • The deadweight costs involved in raising additional revenue rise more than proportionately as the amount of revenue increases. When account is taken of deadweight costs associated with both taxation and delivery of benefits it is likely that these costs are equivalent to more than half of each additional dollar of government spending in New Zealand.

The Treasury’s focus is almost exclusively on deadweight costs and public sector productivity.  The omission of any material discussion of rent-seeking, and public choice issues in general, is extremely important.  The Treasury’s general framework presumes that governments spend money in order to overcome ‘market failures’ and fails to consider the more plausible proposition that they spend money in order to get re-elected or to favour their most important constituencies.  There is no assessment of the level of spending that could be justified on genuine public interest grounds.  Basically, incentives in the government sector are not a problem, so the paper implicitly assumes.

Another serious weakness of the paper is that its benchmarks are OECD countries in their modern, typically big-government, form.  Nowhere is there any recognition of the current reality that the majority of the Western welfare states are in deep economic trouble and the model may well prove to definitively broken.  The 2025 Taskforce in its first report pointed out that the average OECD country:

… isn’t the only model.  In several high-performing Asian economies (Singapore, Hong Kong and Taiwan), themselves with diverse political systems and spending imperatives, total government spending as a share of GDP has consistently been less than 20 percent.

These high-income countries, and other emerging economies, are more likely to offer lessons for New Zealand than the ‘old’ OECD.

Another frame of reference (missing in the paper) would be the performance of today’s OECD countries when the share of government in their economies was much smaller. In the 1950s and 1960s, for example, many of these countries had government spending ratios of around 25 percent. They also enjoyed much faster growth rates.

There are sundry other problems with the paper.  In discussing the Baumol hypothesis for creep in the size of government, it fails to consider why it did not apply in local government for at least a century.  It accepts ‘merit goods’ as a justification for government spending whereas many economists have jettisoned this idea.

Needless to say, there are useful observations in the paper.

It is dismissive of the Wilkinson and Pickett inequality argument and is supportive of privatisation.  It also mentions the bias toward big government of MMP:

The larger the number of parties forming the government and the higher the frequency of elections, the stronger this tendency. It also seems more prevalent in cases of proportional rather than majority-based election systems (for example, see Persson and Tabellini, 1999, 2002).

Overall, my judgment is that the paper is an advance on earlier Treasury work in the area.  But that is faint praise. Both theory and evidence indicate that government spending around New Zealand’s level is seriously detrimental to growth.  I hope some New Zealand academics join in with critiques.


This chart from the Financial Times raises questions about China’s future as an economy based on cheap labour.

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Based on a United States Bureau of Labour Statistics report, it shows that between 2002 and 2008, real hourly wages in China’s manufacturing sector doubled, while they rose by barely 20 percent in the United States. Nevertheless, despite the increase, wages in Chinese manufacturing in 2008 were still only about 4 percent of those in the United States

Countries like Greece and Ireland which are part of the Eurozone and hence tied to a fixed exchange rate are talking about an internal devaluation – reductions in real unit labour costs relative to trading partners – to regain competitiveness.

China is experiencing the opposite phenomenon – an internal revaluation – which substitutes, at least in part, for the revaluation of the yuan that the United States has urged upon it.

Of course the increase in real wages in China has been based on increases in labour productivity which have assisted in maintaining export competitiveness.

The Financial Times reports that:

Chinese labour productivity has been rising sharply at about 10 percent a year since the early 1990s and even more quickly in the past decade, due to technological progress, increased capital investment and rising human capital … From exporting mainly footwear and clothing in the 1990s, China’s largest exports have shifted to computers, computer parts and telecommunication equipment. According to the World Bank, the overall proportion of high-tech goods in Chinese exports rose from about one fifth at the beginning of the decade to almost a third in 2008.

As a result, China is becoming less appealing to multinationals producing cheap low-value-added goods, but much more appealing to those making cheap high-value-added goods, both finished and intermediary.  The industries China is exiting are moving to lower income countries such as Vietnam and Indonesia.


Last week’s National Business Review (April 8) carried an excellent article by Duncan Bridgeman based on an interview with Professor William Megginson of the University of Oklahoma who was attending a conference in Queenstown.

The article notes that Megginson has spent the past 25 years researching privatisation of state assets in more than 100 countries.  He is probably the biggest name in the literature on the topic.  A 2001 review article, Megginson, W and Netter, J, ‘From State to Market: A survey of empirical studies on privatisation’, Journal of Economic Literature, is one of the most cited articles on privatisation.

As the NBR article notes:

The review concluded, “privatisation ‘works’ in the sense that divested firms almost always become more efficient, more profitable, financially healthier and increase their capital investment spending.”

The qualifier “almost always” is important.  As Megginson goes on to say:

“You certainly have variation in that it doesn’t always happen – but on average, across countries, across time, the financial and operational performance of privatised firms is significantly improved.”

Duncan Bridgeman acknowledges this point when he writes:

Of course, not all privatisations ‘work’ and in New Zealand many people point to the re-nationalisation of Tranz Rail in 2003, Air New Zealand in 2001 and the bail-out of the BNZ in 1990 as proof of calamity.

These were three out of around 30 privatisations by New Zealand governments – confirmation that on average and over time, privatisations ‘work’.  For policy purposes, that is the key finding: politicians should not gamble with taxpayers’ money against normal outcomes.

Of course SOEs may not ‘work’ in a number of dimensions either: Terralink failed and many have not met their costs of capital on an annual basis.  Also it is arguable whether the failures cited were due to privatisation.

Privatisation in New Zealand is controversial and Megginson notes that “It’s extremely controversial everywhere”.  Support usually arises after the event.  How many people would today want to reverse New Zealand’s 30 privatisations? – which any government could do, at least in principle.

Professor Megginson also dealt with the proposition that a government will be worse off financially after a sale:

One common misconception is that the government misses out on dividends generated by the firms once they are sold off.

At the campaign Say No to Asset Sales launch this week Labour leader Phil Goff said the state power companies generated dividends of more than $700 million, offsetting the need to raise that money through higher taxes.

But actually what happens is the dividends are factored into the price paid for the asset while the government can still retrieve income by taxing the firm’s profits.

“So if the firm’s profits stay the same the government will at least get a claim on the taxes and if they improve then you are capitalising that stream of earnings.”

Finally, the article states:

National has pledged to retain a controlling stake and give preference to individual “mum and dad” investors.

This is common practice, although it does tend to lower the price offered for the asset.

“It’s a trap for governments because if they under price they are accused of selling cheap,” Dr Megginson said.

“Around the world over 25 years, governments have under-priced with that rationale.”

In my view, the main issue is transferring the business from public to private ownership to reap the efficiency gains.  The means are less important.  Even giving shares to taxpayers is a valid approach.  But there is no good economic reason to criticise open trade sales – the most common method used in New Zealand in the past – since they generally yield the best price for taxpayers.


Much has been made (and rightly so) of the decline in the output of our internationally competing industries (the so-called tradable sector) since around 2005, while non-tradables output grew strongly.

Obvious causes include the loss of international competitiveness associated with increasing regulatory burdens and the huge increase in public spending resulting from the policies of the last government.

This chart taken from a 2010 Treasury report to the minister of finance released under the Official Information Act tells the same story by looking at employment growth in the same period.


The chart shows that employment growth since 2004 has been concentrated in the non-tradable sector, including industries such as health care and social assistance (+26%), public administration and safety (+21%) and construction (+20%), while tradable sector employment (defined here as the primary and manufacturing sectors) has been weak (-8%).

This is not a picture of a healthy economy.  It highlights the economic imbalances the government talks about and underlines the need to shift resources, including labour, from the non-tradables sector (especially the public sector) into our internationally competing industries.


I’ve often thought that our tax legislation should allow people to make voluntary payments to the Inland Revenue Department.  In other words, it should allow IRD to accept payments in excess of the taxpayer’s statutory obligation to pay tax computed in accordance with the tax law.

At present if you overpay tax the system will generally refund it automatically.

I was reminded of this issue when reading this 5 April New Zealand Herald editorial which continued the paper’s campaign for increasing tax to pay for the Canterbury earthquake.

The government has resisted this idea on the grounds that it would hit an already weak economy.  A far better approach would be to cut wasteful and poorly targeted government spending.  A huge amount of government spending falls into these categories.

The Herald reports a poll that found 40% of respondents favour a temporary tax.

Whenever I see people saying they would be happy to pay more tax, I think they should be able to go ahead and do so voluntarily. In fact I would go one step further and allow voluntary payers to indicate the broad area to which they want their money applied, eg police, welfare.

It would be fascinating to see how much additional revenue IRD would receive.  I suspect not a lot.

First, my guess is that if people want to donate money for welfare purposes, most would give it to private charitable organisations in the belief that they are often more effective than the government in such roles.

Second, I suspect that many people who tell pollsters that they favour raising taxes want them raised on other people, not themselves. 

Anyway, if the law was changed to allow voluntary payments to IRD in excess of tax assessments we would soon find out how many people (like the Herald’s editorial writer) put their money where their mouth is.  The IRD could report aggregate payments in the same way that it reports other tax revenue.  What could be the objection to such a law change?


On 5 April employment lawyer Peter Cullen had an article in the Dominion Post on the employment law changes that came into effect on 1 April.

These included the extension of the 90-day trial period for new employees to all firms.

The article concluded: “The changes generally represent a shift of power to employers.”

In fact they represent no such thing.  The comment reflects the old ‘imbalance in bargaining power’ idea with its Marxist origins.

It’s not hard to see the fallacy.

Start with a world without any statutory provisions about so-called ‘unfair’ dismissals.  Then bring in such a rule.  What will happen?

Clearly something will change, because employers now face the risks and costs of being found to have unjustifiably dismissed an employee.  In the first instance the costs will fall on them.  But clearly they will have to shift them – in competitive markets they have no alternative if they are to maintain normal profits.  The costs will be shifted primarily to employees (or possibly consumers through higher prices).  In other words, employees will largely bear the ultimate costs of the provision through wages (or other benefits) that will be lower than otherwise, or unemployment will rise if the costs are not passed on.

This is just basic economics.  It is explained more fully in this study by US labour academic Charles Baird, ‘The Employment Contracts Act and Unjustifiable Dismissal: The economics of an unjust employment tax’, published by the Business Roundtable.

Baird estimates that, extrapolating from US data, the imposition of unjustifiable dismissal restrictions (which did not apply to around half the workforce prior to the ECA) worsened income inequality, lowered real wages by over 7 percent, and reduced employment by 1.5-3%.

Given these results, it is no surprise that where employees have the option of bargaining voluntarily for unfair dismissal procedures in contracts, few opt to take it up.

As in other markets, bargaining power varies at times in the labour market depending on whether labour is in short or plentiful supply.  That helps labour markets to clear.  But employers have no systematic bargaining power, and recent law changes have done nothing to increase it.