Kiwi News and Views

A new book challenges how we need to think about technological innovation.

Last week’s column mentioned the three 2024 Nobel laureates in economics. The column focused only on the 2012 book Why Nations Fail by Daron Acemoglu and James Robinson with little reference to Simon Johnson, although the three have worked closely together for about 30 years. Johnson published last year, with Acemoglu, a 599-page book: Power and Politics: Our Thousand-Year Struggle Over Technology and Prosperity.

Any book covering a millennium is going to be selective, with some of its examples contested. Nevertheless, this one’s basic thesis is uncontestable: technological innovation is not always beneficial and often favours the powerful.

Economics tends to treat technology as beneficial, probably because of Bob Solow’s finding some 70 years ago that it was not possible to explain most of (per capita) economic growth by additional capital. He labelled the gap – the coefficient of ignorance which explained 80 percent of rising labour productivity – ‘technological change’, saying it was ‘a shorthand expression for any kind of shift in the production function’ including ‘slowdowns, speedups, improvements in the education of the labour force, and all sorts of things’. When we are thinking about aggregate (market) GDP we should also include shifts into the market as when natural resources are depleted, subsistence farming becomes commercial farming and rising household productivity shifts housework and houseworkers into the market.

Lumping this miscellany into ‘technology’ is confusing. So to first principles. Joan Robinson defines technology as ‘blueprints’ – a description of how things can be done. In order to be of practical use, a blueprint has to be imbedded in an artefact (physical capital) or in how people do things (human capital). Not all discovered blueprints are adopted. Many are never used or are discarded because they do not contribute to profitability. (Their adoption by the non-market economy and society as a whole is even more mysterious.)

This focus on aggregate market output (GDP) plays down technology’s transformational role. Electricity and the internal combustion engine may have had major impacts on GDP, but their impacts on the lives we lead has been even more extraordinary. Without them we would be poorer, but we would also lead very different lives. Conversely fertility regulation technologies hardly merit measuring their impact on output, but they have transformed the lives of both women and men.

We tend to assume that if something contributes to aggregate output (GDP), it is beneficial to humankind. Of course that is not totally true – think of climate change, smoking and weapons – and economists have given much thought to explain when and why it is not. Economic ‘bads’ (and externalities) are a critical feature of economic analysis.

Acemoglu and Johnson are saying more. I skipped over how we identify the blueprints. Increasingly they are the result of major financial outlays. The evidence suggests that locating genuinely novel (commercial) technologies is becoming increasingly expensive – or as economists put it euphemistically, the ‘productivity of research is falling’. So who makes the investment in research decisions?

The book argues that the impact of new technologies on human welfare depends crucially on social choices about how those innovations are used. Those choices are usually determined by those who hold power. In recent decades the choices have been increasingly steered by tech companies and venture capitalists in terms of profitability rather than social wellbeing.

Thus the effort for new pharmaceuticals is towards those who can pay rather than maximum life enhancing, so we put less into researching ways of medication for those with high mortality and morbidity in poor economies. (A bizarre illustration was that American medicine was much slower to adopt lithium chloride for managing bipolar mood swings than European medicine because the chemical was not patentable so there was no commercial incentive to encourage American doctors to prescribe it.)

The book suggests that, in particular, currently digital technologies and artificial intelligence are increasing inequality while undermining democracy through excessive automation, mass data collection, and intrusive surveillance.

Acemoglu has done a lot of work on the impact of robots, pointing out that the new technologies aim to replace workers rather than complement them. That’s the way our system operates. The authors argue that democracies must ensure that the proceeds of technological waves are more generally shared among their populations. They say there are three things that need to be done.

First, the automatic technology-equals-progress narrative has to be challenged as a convenient myth propagated by a huge industry and its acolytes in government, the media and academia even though it is not always true.

Second, there is a need to cultivate and foster countervailing powers including civil society organisations, activists and trade unions.

Third, there is a need for technically informed policy proposals that supply a steady flow of ideas aimed at improving human wellbeing rather than exclusively targeting private profit.

The book also contains an interesting discussion on avoiding technologies which replace workers and devising ones which complement and empower them instead.

You may be surprised at how progressive (or impractical, if you are of a different political temperament) these Nobel laureates are. It is a reminder that the top of the economic profession reflects much wider political spectrum than the New Zealand one.

New Zealand economics is also imitative. Rather than adopting (or ignoring) the Acemoglu-Johnson-Robinson recommendations, New Zealand needs to apply them to local conditions. Since most – say, 99.7% – of the world’s research (blueprint generation) occurs overseas, our main task is to adapt what is available.

That does not mean we should do no research. Local research is a critical part of the process of effective importing and adapting new technologies. If, as a consequence, New Zealand researchers do some exceptional internationally innovative work, we are twice blessed.

This changes our research strategy. Instead of bewailing that New Zealand does not produce enough commercial blueprints, we need to evaluate it by how successful it is at importing and transferring the internationally generated blueprints here. (Medicine is an excellent example of our success at importing new technologies.) We need to move our approach from its (not very successful) narrow commercial focus to a whole-of-society approach.

While adapting we need to keep in mind the Acemoglu-Johnson reservation that the new inventions are biased towards some groups over others, and we may want to direct them differently.

Our public funding is far too centralised. Why Nations Fail argued that it was the decentralisation in an inclusive society which enabled effective innovation. We have not reached the stage where Stalin’s directive to pursue Lysenkoism and ignore Darwinism set back Soviet biology for generations. We came close to it when the Rogernomes closed down empirical economics research because its results disagreed with them. It has crippled New Zealand economics to this day. Outsiders would be surprised how little of our economic policy public discussion is evidenced based.

Each year the Taxpayers’ Union highlights bizarre ‘research’ grants from the Royal Society’s Marsden Fund. They would be amusing if they were not diverting funds from more valuable activities. They are not at the Lysenkoism level, but suggest that some of members of the grant panels are chosen for their ideology rather than competence. My guess is that there are objectively worthier projects among those that the ideological and non-competent rejected.

Power and Politics: Our Thousand-Year Struggle Over Technology and Prosperity challenges us to think more carefully and creatively about technology policy. It is very unlikely there is any grant funding to do this.

This year’s Nobel awards in economics raise critical issues about the future of the world.

I was not alone with high hopes when the Soviet Union collapsed. It has been good to see various nations leave the yoke of the Soviet Empire and move towards liberal democracies with thriving economies although sometimes it has been two steps forward and one back. But that has not happened to Russia itself, despite it having a comparatively well-educated population and a large economy. It remains nowhere near a liberal democracy and any economic success has been correlated with high oil and gas prices.

Among others who were disappointed was a British economist and political scientist, James Robinson, currently at the University of Chicago. He has just been awarded a Nobel laureateship in economics jointly with Turkish economist Daron Acemoglu and British economist Simon Johnson of MIT. With Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson – also Nobel Laureates – they have been key contributors to the ‘new institutionalism’, which focuses on the contribution of institutions (the social and legal norms and rules) that underlie economic activity.

The approach is well illustrated by the 2018 Why Nations Fail by Acemoglu and Robinson. Like all their books, it is rich in ideas. I focus here on the light it sheds on the Russian experience.

What I underestimated at the time of the Soviet collapse was the importance of institutions such as the rule of law, restraint on arbitrary government, lack of corruption, secure human rights, sound property rights and sustainable fiscal practices (including a robust tax system). They are so integral to many of the economies I have studied closely that I overlooked their importance.

The Soviet empire generally lacked them. Even today, the ‘liberated’ nations to its west struggle, some lapsing into authoritarianism (currently Hungary) and finding it difficult to eliminate corruption (Ukraine is not alone in this respect).

Perhaps it is not so surprising. It took the prosperous Western economies centuries to evolve their current institutional arrangements and they are still not always perfect. What is sad though, is that Russia has made so little progress compared to the years when it dominated the Soviet Union.

The Russian economy is distinguished from the ex-Soviet economies to its west by being based upon enormous mineral reserves – especially oil and gas. The success of these quarry industries crowds out more conventional exportable industries, such as farming and manufacturing (as explained by the ‘Gregory effect/Dutch disease’). Resource-based industries produce substantial rents and there is more private profit to be made from wrestling over the allocation of those rents than by producing things, especially when the members of an authoritarian government are syphoning off some for their private enrichment. The book describes the resulting political economy as ‘extractive’.

Contrast with New Zealand. Admittedly we inherited our institutions from the long-evolving British ones. (Acemoglu and Robinson see their foundation in the 1688 Bill of Rights.) But we are a resource-based economy too. Our resources – sun and water (New Zealand soils are not particularly fertile) – are not as easily monopolised as those found down a well with their associated pipelines. Instead, the rise of the mixed family farm, following the introduction of refrigeration in 1882, dispersed the resource rents across much of the population, shaping the political economy of New Zealand into a popular liberal state with a market economy, which the book describes as ‘inclusive’.

There was almost an important exception. Initially, prosperous sheep farms were not viable north of Taupo because of bush sickness and footrot. Instead, late nineteenth-century Auckland developed around the extractive industries of gold, kauri gum and kauri timber. Fortunately for Auckland, as they became depleted, the railway network facilitated dairy farming in the Waikato region while, as its port became increasingly dominant, local manufacturing prospered. Even so, today a residual of those ‘wild west’ times is still evident in the more commercially vigorous Auckland. (This story is elaborated in Chapters 13, 16 and 18 of Not in Narrow Seas.)

Acemoglu and Robinson argue that inclusive political and economic institutions lead to a prosperous economy, while where the institutions are ‘extractive’ there is poverty and economic failure. A key difference is that the former allows initiative and innovation, whereas the latter stifles it.

But is an inclusive political economy necessary for economic prosperity? Acemoglu admits that China appears to be an exception suggesting its economic success may be but transitory. In my view China’s success has been the result of technology transfer from the West and the economy may not be sufficiently innovative to sustain its growth.

We must be careful though with this explanation. Concentrated effort enabled the Soviet Union to develop nuclear weapons and the sputnik. But it was not generally pervasive. Clearly China’s development of electrical vehicles is impressive, but widespread innovation has been less evident. I await to learn more of the new institutionalists’ explanation for the China anomaly. A major component of its current economic struggle has been a bursting of a Ponzi-type property boom (although one might argue that the finance boom in the West is similarly artificially stimulative). Certainly, China’s government has not shown the degree of arbitrariness and corruption evident in Russia – not as yet.

Both China and Russia show considerable outmigration. The success of those migrants rules out that their countries face some cultural or racial handicap. The outflow of so many able, energetic well-educated Russians to the West adds to my pessimism about its future. Instead of the prosperous inclusive society which one hoped for after the collapse of the Soviet Union, it is likely to remain exclusive and extractive, even after Putin, with its elite fighting over the resource rents. That is disturbing because of the destabilising impact on the world order. That is sad because I so much admire Russian contributions in art, literature, mathematics, music, science and – yes – even economics. Too often though, recently these have been by its refugees in the West.

Why Nations Fail and the other works the three have published are worthy of Nobel recognition. The New Institutionalism reminds us that economics is not just about narrow technical markets but about the wider social context in which an economy operates. Adam Smith, David Ricardo, Karl Marx, Maynard Keynes and Joseph Schumpeter – among so many of our great economists – would applaud.

Healthcare sector management needs to break away from its obsession with financial information and focus on funding for access.

Health New Zealand recently ‘proactively released’ 454 pages about its financial performance to July 2024. Here is a letter it did not release.

Hon Dr Shane Reti, Minister of Health.

Dear Minister.

We have been deluging you with information about our financial performance. Probably no one understands it all. Certainly you won’t. That is probably, conspiracy theories aside, why you appointed Lester Levy as Commissioner for Health NZ, so you had someone you could consult, although it may be doubted whether even he can understand it all in a three-day working-week.

This letter says that it is all dishonest. To be clear, it is not saying that you, Minister, or anyone else is dishonest. Nor is it saying that the accounts sent to you are dishonest – they conform to the Generally Accepted Accounting Principles (GAAP). It is the system which is dishonest.

You announced that the ‘Government’s goal is for all New Zealanders to have timely access to quality healthcare, to improve life expectancy and quality of life’. We can assure you that from the very beginning Health NZ has had a similar goal.

The June 2024 Government Policy Statement set out five priority areas for the health system.

 ‘Access – ensuring all New Zealanders have equitable access to the health care services they need, no matter where they live.

 ‘Timeliness – making sure all New Zealanders can access these services in a prompt and efficient way.

 ‘Quality – ensuring New Zealand’s health care and services are safe, easy to navigate, understandable and welcoming to users, and are continuously improving.

‘‘Workforce – having a skilled and culturally capable workforce who are accessible, responsive, and supported to deliver safe and effective health care.

 ‘Infrastructure – ensuring that the health system is resilient and has the digital and physical infrastructure it needs to meet people’s needs now and the future.’

You then identified five access targets (none of which we are currently being attained or likely to be attained with current financing), adding that ‘focusing on the health targets did not mean other areas would be neglected’.

Meanwhile a month earlier, the May 2024 budget, from a totally different part of government, voted Health NZ insufficient funds to deliver those ambitions. It is as if two parts of the government brain are disconnected from one other.

Were they connected, the government would offer a certain amount to Health NZ; we would then come back with an estimate of how much we could deliver with that funding. There would follow a bit of bargaining but ultimately we would all end up with adequate funding for realistic goals, if not your June ones.

That is not how it happens. It is more like an architect being asked to design a five-bedroom home but being offered funding for a two-bedroom one. That is what is meant by the system being dishonest.

The dishonesty distorts the running of the public healthcare sector. Its  administration has become obsessed with its finances, while ignoring its healthcare performance. It is evident in the document dump where there are papers describing themselves as reporting ‘performance’, when they are merely dealing with ‘financial performance’. The actual performance of the healthcare system – that is, how well those needing healthcare are being treated – hardly appears.

A June document reported an expected $604m financial deficit for the 2023/4 year. The deficit is made up of $529m of a pay-equity revenue stream which had not been received (presumably an accounting failure), $183m which was about COVID decisions which occurred in earlier years, and $40m of ‘actuarial and writeoffs’. Without these accounting adjustments (and probably some others), Health NZ would have been running a surplus (of over) $148m.

Admittedly there was some ‘operational overspend’ (at least $385m more compared to that planned in March). That means that in those last three months, Health NZ spent another $385m more on healthcare than it planned. Most people would think that was a good thing. But we are so obsessed with the financials that the benefits of any extra care were overlooked.

To be clear, we are not objecting to the application of the GAAP rules (which are probably necessary for government borrowing). The issue is that they should not dominate our thinking about healthcare provision. The law articulated by Don Gilling, a retired professor of accounting, is that the way the system is scored shapes the way the game is played. We should not be scoring healthcare according to the GAAP rules.

I’m afraid, Minister, we have all been trapped by this scoring system. You have said there is a ‘healthcare crisis’. There is not one. Most parts of the healthcare system are working brilliantly once one is inside it. As your ambitions set out, the failure is because people in healthcare need  are not getting inside it. That is because Health NZ does not have enough resources. Give us the funds and we’ll meet your ambitions. 

What we have is a financing crisis; insufficient funding means that there are too many people who are not getting access to the quality care you say you want. (We don’t know how many; unlike many other affluent nations we do not have a comprehensive survey of healthcare needs.)

That means, Minister, your ambitions, your expectations and your targets are pointless. They will remain so until the government provides the funding to meet them.

In June 2024, Health NZ told you, Minister, that ‘our intention is to take on a savings target of $2 billion in 2024/25 Budget on the premise that … this is a comparable target to other agencies across government (7% of revenue). … No frontline clinical employees’ roles will be impacted through the savings target.’

The entire personnel costs of the non-medical employees of Health NZ were about $1.6b last year and the spending on ‘infrastructure and non-clinical supplies’ came to another $1.5b.The statement seems to be proposing to cut those items by two-thirds. It is joking.

The greater part of the $2b reduction is likely to come from financial juggling (consistent with GAAP, of course). It won’t be sustainable, and the following year there will be another financial deficit. In any case, there is going to be the ongoing access deficit, unless the Government fronts up with the required funds. We’ve set out the failures of the current situation bluntly, Minister. You have got to stop talking about a ‘health crisis’ and focus on the funding crisis. Unless you do, the limitations on access to care will continue and your ambitions will remain unrealised.

Yours etc (signature deleted under obscure provision of the OIA).

PS. This letter may not have been sent.

PPS. A balloon fell out of a fog and settled down in the middle of a large green field. The traveller in it asked a bystander where he was.

‘You are in a balloon which is in the middle of a large green field.’

‘You’re an accountant, aren’t you?’

‘How did you know?’

‘Your advice was precise, accurate – and of no bloody use.’

‘That will be $200 plus GST.’

What might the public’s increasing demands for safety and security tell the economist?

Criminology and economics are quite different disciplines. Someone from one discipline trespasses on the other with the greatest of caution, something which, I’m afraid, not all economists have. There is a foolish economics literature about the ‘optimal level of crime’. Before it raises your hackles, it is better framed as the optimal level of criminal enforcement, something which must trouble greatly the Treasury desk officer struggling with the law and order vote. This year it amounts to $6.7b (police $2.6b; corrections $2.1b). It is up $2b (or almost half) in the last six years. It amounts to the average adult paying almost $5 a day in tax.

The size and growth of the sector are puzzling, since overall the level of crime has not been increasing. The Ministry of Justice has run a New Zealand Victim and Crime Survey since 2018. It is far more reliable than offences reported to the police because not all crimes are reported and not all of those reported are to the police – common reasons are because the incident was too trivial or it was reported elsewhere (fraud is more likely to be reported to a bank).

The survey results are all over the place but with the exception of fraud offences, which are rising, generally the crime trends have been stable or very gently falling since 2018.

(I made a small research contribution to explaining these trends when I pointed out that Māori were poorly prepared for their postwar migration into the big cities, which resulted in social disruption including higher incarceration rates. As Māori have adjusted to urban life the imprisonment rates among the young have fallen dramatically; the proportion of Māori who are victims of crime has been falling and is now close to the national average.)

However, the public perceptions show increased concern about crime. While 30 percent of the public said they felt ‘completely safe’ in 2018, only 24 percent had similar feelings in 2023. Meanwhile, the proportion who felt ‘unsafe’ rose from 10 percent in 2018 to 15 percent in 2023. Hence the public demand for increased law and order spending. It is high across most parts of the political spectrum, including among those otherwise antagonistic to government spending.

The research literature describes a phenomenon called a ‘policy entrepreneur’, who promotes an agenda by exaggerating the problem the community faces. But the community has to be receptive to the exaggeration. To understand its willingness, we might turn to another discipline – psychology.

Abraham Maslow proposed a hierarchy of (human) needs. It is frequently presented as layers in a triangle, with a point which draws attention to the upward direction. However, the casual observer may think that the needs at the top are smaller than those at the bottom. So here the hierarchy is presented as a stack.

Maslow’s Hierarchy of Needs

Self-actualisation needs

Esteem needs

Love and belonging needs

Safety needs

Physiological needs

Stack or triangle, the physiological needs – essential for human survival and include things such as food, shelter, and clothing – at the bottom are the foundation of wellbeing. They are the needs with which economics is most concerned (and which are measured by GDP). But observe that the economy has much less to contribute to the remaining higher levels (although the importance of conspicuous consumption – the display of ‘positional’ goods – to esteem needs should not be underestimated).

Immediately above the physiological needs are the ‘safety’ needs with the implication that as physiological needs are met, people turn to their safety needs. That seems to be what is happening.

There is no question that the physiological needs of the vast majority are being better met than at any time in human history. That is true almost everywhere, although for many people in the world there remain serious physiological deficits. But in some parts of the world – including New Zealand – there is widespread affluence.

Certainly, people demand more income – hence the demand for tax cuts – but the same people may be retiring earlier and working shorter hours or taking lower paid jobs because that better reflects their life demands.  (Two hundred years ago, a 70 hour working week was not unusual and people did not retire but worked until they died.)

But we should not be complacent. Perhaps a fifth of the population are struggling rather than affluent. Typically, they are families with children.

So the economic logic is that the economy may becoming less important in public life. It is still there of course, but not as prominent as I recall it being in the 1970s. Economics remains foundational in political and social development. Moreover, economic goods and services remain important in dealing with safety needs to the extent of at least $6.6b a year of public money and all the private money spent on safety. (Additionally, as already mentioned, positional goods are important for esteem needs.)

Whether we are deploying the law and order resources most effectively is an economic concern. Often policy entrepreneurs have solutions to complex problems which are clear, simple … and wrong or wastefully ineffective. It is also a feature of New Zealand’s approach to public issues to ignore prevention, instead focussing on ambulances at the bottom of the cliff and neglecting fences at the top. (We are so unprepared, the ambulances usually arrive late.)

I began by saying that economists do not have a lot to say about law and order so perhaps I should stop at this point. I finish with the slogan of a former British Prime Minister, Tony Blair, who said that his government was ‘tough on crime; tough on the causes of crime’. I cannot think of a New Zealand politician who has expressed a similar sentiment.

Today’s mañana strategy will lead to a crisis for the oldest elderly.

It is said that the only certainties are death and taxes, but a lack of each causes uncertainties. As longevity increases, the pressures on state spending increase. A reluctance to increase taxation means the pressures on the elderly increase.

The dilemma is usually presented by the rising ratio of those over 65 years of age, who are net consumers, compared to those in the 15-to-65 age bracket, who are net producers. Sometimes called the dependency ratio, it is currently about one to four but is expected to rise to about one in two by 2074. (It was one to seven in 1974, although there was also a higher proportion of children, and women’s participation in the paid workforce was not as great.)

In some respects the ratio is misleading. Many people over the age 65 are still in the paid labour force. Others retire before they are 65. Many in the working age groups do not work full-time. Patterns change over time. Moreover many of the (especially younger) retired participate in the unpaid voluntary labour force making a positive contribution to their communities, if not to GDP.

A further complication is that the over 65s are far from homogeneous. At the very least, it is useful to distinguish the young-elderlies from the old-elderlies. The over-80s get almost treble the healthcare and social support that the 65-to-69-year-olds get from the public purse. For a 90-year-old it amounts to about as much as they get from New Zealand Superannuation (NZS). Increasing longevity means the number of (more expensive) old-elderlies are growing faster than the young-elderlies.

While selecting an age such as 65 is a mechanical attempt to portray a complicated situation, the actual age is a key one in fiscal management. At 65 almost everyone is entitled to NZS, which gives them a minimum after-tax income of around 40% of that average wage for a single person (currently about $27,000 a year), irrespective of their other income. It is taxed, but because our income tax system is not very progressive, it remains valuable to those on high private incomes.

The Treasury has recently, and once more, pointed out that with the expected increasing numbers of the elderly the current regime is going to put increasing pressure on the fiscal regime. It is hard not to conclude that current arrangements are fiscally unsustainable unless tax rates are substantially raised in the long run. (There are other great pressures for more government spending which also demand higher tax rates. Borrowing is a short-term measure which defers raising taxes to a later date.)

If you think there is a fiscal sustainability problem which cannot be resolved by higher tax rates – I do – then there are two major ways to the resolution, aside from mañana, which I also discuss.

The first is to raise the age of eligibility for NZS. The National Party campaigned on raising it from 65 years to 67 years. (The coalition agreement with NZF abandoned this proposal.) I leave you to judge whether the proposal to raise the age from 65 to 67 was courageous or timid; I think it is the wrong strategy.

What we should be doing is setting a formula for the age of eligibility based upon life expectation, not a numerical age. When in 1993 the age was last raised to 65 (by agreement between the unlikely pair of Ruth Richardson and Michael Cullen), a person of that age had a life expectancy of another 25 years. Today a 67-year-old has a life expectancy of about the same 25 years. In the twenty-odd years since 1993, people’s life expectation has gone up about two years. (These figures are based upon the Statistics New Zealand life table, and yes, the data really shows that one has about a quarter of century more life at 67 on average.)

I suggest that we should set the age of eligibility for NZS at where there is an average life expectation of, say, 25 years. As life expectancy rises (or falls), then the age of eligibility should automatically rise (or fall).

Two important caveats. The eligibility age should not be jumped up but rise incrementally, as it did under the Richardson-Cullen scheme. And second, there has to be an incomes-tested benefit for those who are unable to provide for themselves below the age of eligibility either by working or having insufficient savings. Again that was a feature of the Richardson-Cullen scheme. (Cullen’s personal contribution was the introduction of Kiwisaver, which boosts private retirement incomes.)

A second strategy is to abate more strongly the NZS of those on higher incomes. An easy way would to be to put all superannuants on a separate tax code with higher income tax rates which reduce the state contribution as private incomes rise. The bleed-out rate should be high enough so that the very well-off would opt back to the standard tax rate and forgo NZS completely. (This regime is not very different from what I suggested for a universal family benefit.)

The alternative strategy to these two might be called ‘mañana’, where we put off decisions until later, perhaps in the hope that we shant have to make them in our lifetime. But something will happen in most people’s lifetimes. It may be an ‘overnight’ crisis, as has happened in a number of countries when a fiscal collapse forced a sharp rise in the state retirement provision – none of this planned incremental increase stuff with a good warning it was going to happen.

Or it may be a creeping crisis, in which the government struggles with its fiscal position which it resolves in regard to the elderly by cutting back their provision for healthcare and state support. So they – the old-elderly especially – find themselves either paying for more of it themselves or going without. (Yes, it may be already happening; we practise mañana a lot in this country.)

That would mean that many of the young elderly would remain reasonably well-off, but as they age and their frailties increase, they will find themselves living in increasingly difficult circumstances.

Actually, that is not quite right. Under mañana, an increasing number of the young elderly are going to find themselves coping financially with their parents in their nineties. Those parents will be lucky to have their children’s support; others will not.

In making the case for the strategies of raising the age of eligibility for NZS and bleeding-out the payment at a higher rate (yes, I’d probably go for both), I am not so much arguing for cutting back funding on the elderly but allocating the funding to deploy it more effectively. I remain of the view that tax rates are going to have to rise in the future.

As for the individual reader, I don’t give financial advice but commonsense may well conclude that if you are young, you are unlikely to get your NZS at 65; if you are older, you are likely to have a difficult old age if we continue with mañana. In both cases, prudence suggests that private provision for retirement remains a personal priority.

(A recent Treasury view on these issues is Longevity and the Public Purse Fiscal and Economic Impacts of Increasing Longevity by Dominick Stephens who is Treasury’s Chief Economic Advisor.)

Stagnation and Contraction

In this column I use the less familiar measure of GDP per capita instead of the GDP measure favoured by the commentariat. I became familiar with it when I began doing international comparisons because of the population differences between countries, while I depended upon the measure while working on New Zealand’s economic history because of significant population change. The measure is also better for thinking about distributional issues.

The most recent (seasonally adjusted) GDP figure published by Statistics New Zealand showed a 0.6 percent fall in GDP per capita in the June quarter 2024 over the March quarter. Except for a minor blip in the June quarter 2023, per capita GDP has been falling for almost two years. That’s about the same time as the stagnation associated with the GCF when it took five years for per capita GDP to return to the level it had been when that GFC stagnation started.

It is hard to work out what was happening just before this decline began, because of the disruption from COVID, but the current level of GDP per capita is much the same as it was five years ago in late 2019 just before the disruption.

What is disturbing is that the current account deficit in the balance of payments (the external account) has deteriorated from about $10b a quarter before 2020 to around $30b today. That means that exporting is weak and not driving the economy. The volume of exporting has been near-stagnating since 2019.

Another factor in the decline has been that the Reserve Bank has consciously engineered a contraction to restrain inflationary pressures, using higher interest rates which cut back investment, thereby weakening the economy and making it harder to raise prices and wages. Higher interest rates tend to add to the current account deficit too.

It is not possible to tell yet whether the economy is entering a long-term stagnation phase, but had it continued to grow at the rate in did between 2005 when the GFC stagnation ended and 2019 just before the COVID stagnation began, the economy would be 8 percent larger than it is today. That might mean your income would be 8 percent higher, and with tax revenue up 8 percent the government would have more room to move on the fiscal front. Perhaps some of its more brutal cuts could have been avoided.

The 0.6 percent fall is an average (as is the 8 percent loss). Some people will be experiencing greater reductions in their incomes, while there will be others who experience a real income increase. We don’t have good measures to monitor such change (and there is a lot of dynamic change as people enter the labour force and retire). It seems likely that recent immigrants have taken up a higher share of incomes, so that the fall for those who have been here longer has been bigger than the average. That would certainly include those with significant mortgages who are paying higher interest rates – very often families with children.

So the story is a contracting economy partly induced by the RBNZ, partly by a weak external performance. The indications are that Labour lost power in 2023 because it was out of touch with its electorate on many dimensions, but the struggling economy added to the grumbling and gave the government no room for buying off the grumblers.

The Coalition Government may be more in touch with its support – except the diversity of the three parties means there are sharp differences within the support base – but it too faces a struggling economy. The austerity measures it has been taking may seem sensible in the immediate term, but I shant be surprised if by the time of the next election the resulting failure in government delivery as a consequence of the cutbacks will become apparent.

I am not going to say much about what needs to be done to get the New Zealand economy out of this stagnation. Obviously, both the investment sector and mortgage-holders expect some relief as the RBNZ reduces the OCR. You will routinely hear claims that we need to improve productivity performance but the trope is weaker when it comes to explaining the mediocre performance and how that weakness connects with the policies being advocated. The infrastructure build makes sense but I am not sure that much of it will boost productivity, even though it will improve the quality of life and the sustainability of the environment.

The historical record emphasises the importance of the export sector to economic growth, especially when it could sell to booming economies. For the last few decades that has been those centred on China and a group of economies around it which have taken our export volumes and given us good prices. It is probably not accidental that New Zealand has recently been struggling as long as China has. I am not optimistic that China will return to its previous vigorous growth.

We need to give thought to the possibility that New Zealand is entering another period of long stagnation, although that may be also happening in most affluent economies. We need to move away from the uncritical optimism that things are going to get better if only we adopt a set of policies which are ideologically, rather than empirically, driven (and that means doing a lot more thoughtful empirical research).

You know the story of the woman who sued for divorce from her economist husband on the basis of non-consummation? ‘He stands at the end of the bed, beating his chest and saying things are going to get better under his policies, but they never do.’

Congestion pricing is easier said than done.

The first seminar I attended in Britain – around sixty years ago – explained a scheme for road usage pricing which would eliminate traffic congestion and direct roading investment. It was impressive and elegant (as many such seminar propositions are) but proved impractical and costly to implement (ditto). Twenty-five years ago, a geekish Minster of Transport, Maurice Williamson, made a similar proposal which would use GPS sensors in vehicles to monitor where they went and charge them. It, too, proved impractical, costly and would have invaded privacy. The current Minister of Transport, Simeon Brown, has announced the introduction of congestion pricing for roads, but with insufficient detail to assess whether it will be workable.

We already toll a few roads. The minister has promised a wider use of tolling, with the revenue to fund further roading investment. Fuel taxes and road-user charges levy vehicles for their road use, but they are crude, hardly reflecting the quality of the road or the degree of congestion.

Broadly, congestion charging involves vehicles paying a levy when the road is overcrowded, so the use-charge varies by time of day. The economic case belongs to a class of market failures called the ‘tragedy of the commons’, where individuals use a free resource at the expense of others. This can result in overconsumption, underinvestment, and depletion of resources. Each extra vehicle reduces the ability of other vehicles to use the roads. At worst it produces gridlock with drivers fuming that if only other drivers were not occupying the road, they could move.

Standard economic responses to the tragedy of the commons are regulation (only buses may use this lane) and private ownership of the resource (which is not practical in the case of roads). Congestion pricing is a commercialisation, where the vehicle pays the road ‘owner’ (typically a public authority) a fee for its use. The price might be set to maximise the revenue or to maximise the efficiency of use, which is not the same thing (the road owner is likely to be a monopolist).

There are exaggerated claims about the cost to the economy of congestion, with promises that its elimination will markedly boost GDP. That is not true as far as private cars are concerned. The time savings – like  the fifteen extra minutes that one might be able to spend in bed in morning – won’t appear in GDP, but they are gains nonetheless. (Another timely reminder of the difference between output and welbeing.) It is even conceivable that GDP will be depressed as commuters waste less on petrol – carbon emissions will be too. (There is a caveat; what if the charges encourage the spread of cities as when the commuter choses to use the fifteen minutes to live further out of town? Economic analysis is riddled with such caveats.)

There are likely to be gains to business which are ignored if we focus upon commuters. Businesses trucking goods around do not have the option of using public transport. (A concrete mixer hardly fits on a bus.) An example of the costs to Auckland businesses is that in order to catch the evening flight, shipments have to leave the factories an hour earlier because of end-of- the-day congestion. The quicker trips would be productivity gains. So business has an interest in getting people onto buses and trains in order to free up the roads for their use (as do commuters in cars), providing a justification for cross-subsidising from private to public transport.

The economics is less helpful on practicalities. The exact form of the charging will matter. will be easier to introduce congestion charging in some cities than others because of their geographical configuration. Keeping the capital and administration costs low is the ideal. (Not incidentally, it is this implementation phase where many politicians parties fail; it is easy to dream up policies whose implementation is a nightmare when you are in office.)

Getting the politics through may not be easy either. Providing implementation is not too clumsy there will be support from, say, Auckland business for congestion charging. But there may be resistance from commuters even though it may be in their ultimate interests. A particular group of grumblers will be those whose jobs require them to turn up or leave during the congestion period even if they cannot afford the extra payments; the scheme will amount to a wage cut.

Given the likely political resistance, I was surprised that the minister announced that the revenue would be shared between the local authority and the centralised Waka Kotahi/ New Zealand Transport Agency. It will be so easy for the resisters to present this is as yet another Wellington tax grab.

I would have thought that once the facilitating legislation had been passed, it would be politically astute to handover the implementation and operation entirely to each local authority. The minister would benignly say to grumblers that is a local responsibility: ‘don’t come at the minister if you think there is a cockup, go to them’.

That means leaving all the revenue to the local authority too. They may want to spend it on improving their transport network, reducing rates, spending it on ‘nice-to-haves’ or whatever. That is their local decision – nothing to do with the central government. (Cough, cough. Don’t be surprised if Waka Kotahi surreptitiously rebalances some of its spending away from those centres which have the good fortune to be able to charge for congestion.)

There is a broader issue here. Centralisation often means that ministers get into dog fights that political commonsense says they should stay out of. For instance, the centralisation of the public healthcare system resulted in the Minister of Health getting involved in fracas over failing small hospitals rather than leaving the matter to the local health board.  Well, really! Is that the best way to spend ministerial time? (Sometimes that may be all a minister is capable of; every Cabinet has lightweights.)

The Minster of Transport has made a major strategic decision that congestion prices for roads can be introduced by local authorities. There are strong economic reasons in theory for them, although the theory warns there may be distributional consequences. A big challenge may be implementation. (I repeat that the minister should stay out, leaving the challenge to each local authority.) A bigger challenge may be the politics (where again the minister should keep her or his head down). I am not expecting a fully effective congestion pricing regime to be up and running anywhere soon.

The background to In Open Seas: How the New Zealand Labour Government Went Wrong:2017-2023

Not in Narrow Seas: The Economic History of Aotearoa New Zealand, published in 2020, proved more successful than either I or the publisher (VUP, now Te Herenga Waka University Press) expected. I had expected that it would be a sleeper, a steady seller which would eventually reshape the way we thought about our history and our country.

However, it sold well. The obvious next step was to update it. It was to be a more future-oriented book. I titled it In Open Seas to indicate that there were options as to where we might progress. Early on, I made the decision that its voice would be more personal, more reflective because it would include my judgements about those future options. I also decided to link it to Not in Narrow Seas by describing some of the challenges I had when I was writing the earlier book.

The initial theme was transformation, following Labour Prime Minister Jacinda Ardern’s statement that hers would be a ‘transformative’ government. I thought I could add a bit of intellectual weight to the underlying transformation using the background of the nation’s economic history. But it became evident that whatever its aspirations, the Ardern-Hipkins Government was not going to deliver on them. As it became increasingly obvious to the informed that many of Adern-Hipkins Government’s policies were suicidal, the book increasingly transformed into a critique. (This is not a book about its politics; others will write about that.) I added the subtitle: How the New Zealand Labour Government Went Wrong: 2017-2023. The critique is not always sympathetic: the Government’s behaviour sometimes forced me away from the more temperate tone of Not in Narrow Seas.

I completed the first draft of the book in July 2022, and then commenced the revision and updating. More material was added as the Ardern-Hipkins Government did not change its course. But I did not expect the Government, with its huge majority, would lose the October 2023 election. By the time I sent it to the publisher, their publishing program was already full for the rest of 2024. By 2025 events and policies will have moved on under the Luxon-led Coalition Government.

That meant the book, as conceived, was no longer contemporary enough. I looked at the possibility of revising the manuscript. It contains much useful material including setting out new direction and reporting on some policy failures. Some of it is so prospective that it will be beyond the comprehension of the conventional wisdom for some time. No matter. It took 40 years to recognise the significance of child poverty, damaging two generations of New Zealanders in the interim. Hopefully, the country will respond a little faster to some of the issues raised in In Open Seas.

However, the Coalition Government has embarked upon such a different direction that a total reconstruction was required. Better to start a new book.

What to do with the manuscript of In Open Seas? I could have stuffed it in a bottom drawer. But because there is so much valuable material I decided to publish it, as is, as an e-book. This is where it is available.

In doing so I have resisted the temptation to do yet another revision and updating. I hope that readers will forgive the book’s limitations. To have done more would have meant that In Open Seas would never have been published.

The book may provoke a less than mild reaction from some Labour loyalists. In a few years’ time they will realise that their government lost its direction. Rather than plodding on, they should take the standard advice for those lost in the bush.

Stop. Sit down and think.

Think carefully about how the situation arose.

Can you retrace your steps?

Gain some height to get a better perspective.

The aim of publishing this book is to help them do so. Even if its map is not perfect, I am confident it has some clues for a better path.

Those who are not Labour loyalists will also find the book useful, as they reflect that the Coalition Government’s ‘back on track’ is not taking them anywhere near where they want to go. We really do need a fundamental rethink about the future path of Aotearoa New Zealand. I hope this book – and my future writings – contribute to the rethink.

*********

The final section of In Open Seas, called ‘sailing in a new direction’, provides a chapter-by-chapter synopsis.

1. About the Author: Hello! The study argues for a Rawlsian framework for public policy, which evaluates it on the basis of the benefit to those at the bottom of society.

2. Wellbeing: We need to refocus from our obsession with measures of material output, such as GDP, towards wellbeing, despite this being a more complex notion.

3. To Market, To Market: Markets are a very powerful means of coordination in a complex affluent economy. But they need to be regulated in order to work most effectively for enhancing wellbeing.

4. Economic and Social Development: Economic growth, say as measured by GDP, is not the same as economic and social development, the way that a society evolves. A major contribution to either is technological change, which is neither inherently good nor bad, but usually has to be regulated to promote wellbeing. The origin of most technological change is overseas and it has to be adapted for New Zealand. We overrate our ability to accelerate economic growth. We have more influence over the patterns of development.

5. The Environment: The environment is an integral part of economic growth and wellbeing. We should be aiming for it to be as sustainable as possible.

6. Overpowering Markets: Are markets overpowering our lives? Will we end up valuing everything in dollar terms rather than human ones?

7. Is the Rich World Going Into Secular Stagnation? Whether or not the world (and New Zealand economy) is entering a period of long-term stagnation or slower growth, the following need to be addressed:

 avoiding stressful unemployment;

 lifting the relative incomes of those at the bottom;

 improving the quality of life;

 improving safety;

 increasing opportunity enabling the achievement of capabilities;

 promoting sustainability.

8. The International Order: While throughout New Zealand’s past history the international order has been dominated by one of two hegemons – Britain and the US – or the transition between them, the future is likely to be a multipolar world. Even if it is a bipolar international order, New Zealand will have to tread a narrow path on economic, security and cultural issues between the great powers rather than relying on just one of them.

9. The Open Economy: Because it is small, the New Zealand economy will be a specialist one, concentrating on resource-based exports despite trying to diversify. It will have to maintain an open economic stance to the world, challenged by the reluctance of significant potential trading partners to open up their markets to pastoral imports or to even notice our existence.

10. Migration and Diversity: While there may not be more social diversity these days than in the past, it is certainly more publicly evident. That places a challenge on how to evolve a coherent nation. Tolerance is critical. An important source of diversity is immigration. It needs to be better organised and more strategic. Immigration will not solve the aging of the population. The age of entitlement for New Zealand Superannuation needs to rise in a planned, slow, transparent manner. The fiscal savings could be used to improve the healthcare of the frailist elderly.

11. Māori: The notion of being Māori has evolved. Today being Māori is primarily an ethnic or cultural matter rather than a descent (or racial) one (although whakapapa remains important). We should focus on the achievement story rather than the grievance story. Even so, most socioeconomic indicators of those who identify as Māori are lower than the national average. The gap is slowly closing. Because being Māori is evolving, it is difficult to forecast where they are going. It is critical though, that our thinking about Māori is not limited to keeping them in the past ignoring the changes, ignoring the achievements, ignoring their diversity.

12. Te Tiriti o Waitangi: There are many misunderstandings as how the treaty signed at Waitangi in 1840 came about and what the text contains. ‘Originalist’ interpretations can be rejected for any close historical/textual analysis. There was no common view of its intentions at the time of signing. Its meaning today arises from the dialogue which has subsequently occurred; it will evolve further.

13. Governing New Zealand: A modern social democracy depends upon an elected dictatorship. One way of understanding the paradox is to see it as founded on a social contract. Te Tiriti is such a social contract; that was the intention of at least one person involved in the drafting (it was not everyone’s intention).  New Zealand should continue to progress towards a republic, which is not so much about having a (distant) monarch or president as head of state, nor about the diminishing ties with Britain. It is about everyone having equal social status and value; a civil society in which supreme power is held by the people and which recognises the rights of minorities.

14. Centralised New Zealand: Those who signed Te Tiriti o Waitangi were thinking in terms of a minimalist state. Over the years New Zealand has become increasingly centralised. The pressures for increasing the powers of the centre continued. New Zealand should be less centralised, not only because the centralised state suffers from rigidity and is slow to innovate-, but because decentralisation and tolerance may be the only way for a liberal democracy to maintain coherence in the face of increasing expressions of diversity. Decentralisation is not only about giving individuals greater discretion in their decision making. It is also about encouraging the organic growth of social institutions to fill the hollow society. An important institution for decentralisation is local government.

15. Co-governance: Co-governance must be distinguished from partnership, self-government and co-management. Its origin and meaning is unclear. It does not come out of Te Tiriti o Waitangi.

16. Accountability: The government – the executive of Cabinet and the public service – of a liberal democracy is held accountable to the public by a number of mechanisms, only one of which is regular ‘free’ (i.e. independently run) elections. Many of the mechanisms exist in principle, but do not function well. Parliament holds the government to account very poorly. Among the changes to strengthen this function are:

 a greater recognition of importance of Parliament’s accountability responsibilities;

reducing political parties’ power over MPs chosen by the party list;

reducing the influence of political funding;

making Officers of Parliament those commissioners whose function is to hold the government account and who are currently within the executive they are meant to be monitoring

strengthening the Official Information Act (especially by better funding the parliamentary officer monitoring the OIA – the ombudsman).

 Until there is a considerable strengthening of the accountability mechanisms, the parliamentary term of three years should not be extended.

17. The Public Record: The maintenance of the public record is a key element of holding the government to account. The recent stewardship of the Department of Internal Affairs which is responsible for Archives New Zealand has ignored that central role in democracy. The Department’s record in regard to the National Library, for which it is also responsible, has also been disappointing. Both agencies need to be housed elsewhere. The Chief Archivist should be an Officer of Parliament.

18. Generic Management: New Zealand management is dominated by the cult of generic management, of managers who profess to be able to manage, but know little about the institutions they manage. In fact they do not manage very well, often reducing the professional capacity of their institutions. There is a need to shift to a new style of management which respects professional skills and the integrity of each organisation.

19. The Healthcare System: Often healthcare is poorly delivered by the market. That is why we need a publicly provided large and complex healthcare system with unified funding. The issue is not that its structure is wrong and we need another redisorganisation. Rather, it is managed badly with insufficient attention to patients and the people who treat them. It is typical that the last centralisation (redisorganisation) paid little attention to quality control and local accountability. Changing the balance between generic and professional management of the system is both the priority and, given the entrenchment of the incumbent managership, a great challenge.

20. Education and Science: The research and tertiary education sectors became dominated by a commercialisation philosophy when they meekly accepted the neoliberal restructuring of three decades ago. Consequently they have become top-heavy with generic managerialism and the resulting transaction costs. They have lost their purpose of contributing to New Zealand by maintaining the country near the international intellectual frontier.

21. Inequality: Distributional inequality is tricky; commentators often confuse different notions. Moreover, their focus tends to be on the existence of inequality, rather than why it occurs and how it has changed. The chapter explains some of these issues in preparation for the following chapter.

22. Poverty: The definition of poverty involves a social judgement. Mine follows from the 1972 Royal Commission on Social Security, which wanted a society in which people are able to feel a sense of participation in and belonging to the community – a very Rawlsian approach. In 1990 the approach was abandoned for the less generous standard of sufficiency to sustain life and health which has dominated social policy since. The vast majority of the poor are children and those who live with them. Poverty is not confined to any ethnicity. The effect of the 1990 ‘redesign of the welfare state’ was to double the number of children in relative poverty. The evidence is that in this new regime many people are below an adequate standard of living and are struggling, compromising their health and their future prospects. The implication of the 2018 Child Poverty Reduction Act with its objective to halve child poverty, thereby reversing the redistributional cuts of three decades earlier, was surely the most revolutionary ambition since the Rogernomics revolution. However, the Ardern-Hipkins Government failed to really pursue child poverty reduction, probably because it did not understand what it was doing.

23. Redistribution: Paying taxes is a part of citizenship. The wherewithal to pay the taxes arises from individuals being part of a community. They would have little income without the economy which the community creates. Rawlsians are left with the challenge of attaining adequate wellbeing for those at the bottom without compromising the economy and overall wellbeing. Fortunately wellbeing for most of the population is not particularly related to their material income. The current New Zealand system is neither efficient nor especially equitable.

24. Modernisation: Societies continually face shocks and change. Modernisation is the task of adapting and evolving its institutions to these new circumstances. The chapter illustrates this by reference to the changes which have happened since 1972 which require rethinking how the principles set out by the Royal Commission on Social Security need to be applied. These include the rise of married women in the paid workforce and the higher level of evident unemployment together with the inconsistency recognised by the Royal Commission between the Social Security System and the Accident Compensation System. New Zealand suffers from intellectual and policy inertia supported by sclerotic pressure groups with the consequence that it modernises slowly and badly.

25. Making Policy: Policy design is a discipline which should start off with a detailed specification of the problem followed by a careful analysis. However, it is common in New Zealand to decide on a policy solution and construct the justification for it based on selective anecdotes. That is why so much policy is badly designed and why the repeatedly amended botch jobs look so Heath-Robinson.

26. The Covid Crisis: This chapter describes the Covid crisis and the evolving policy response. It contributes to the lessons reported in the next chapter.

27. Climate Change Policy: The chapter uses the experiences of climate change policy (and the Covid crisis) to illustrate the critical conclusion that it is extremely hard to replace bad policies with good policies. We frequently imitate foreign practices failing to adapt to New Zealand-specific conditions. New Zealand’s contribution to global warming is insignificant and has been even further limited by imitating rather than adapting overseas thinking on climate change. New Zealand’s economic and social sustainability may have been compromised. The way we have measured emissions – on a production rather on a consumption basis – has shaped the way we think about the problem (Gilling’s Law), often to the detriment of New Zealand’s interests. We should be focussing more on the cloud than the emissions joining it. That suggests we should treat long-life and short-life emissions differently and reinforces the conclusion that we cannot rely upon forestry sequestration of carbon.

28. The Public Discourse: The public discourse depends upon truthiness rather than expertise, celebrities rather than experts, personal abuse rather than rationality, self-interest rather than independence. The low standards exist from the bottom of society right to the top.

29. Mañana New Zealand: Public policy is very much mañana, putting off making decisions until it is too late, without any anticipation of the future. Dornbusch’s law is that ‘a crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought’.

Epilogue: There is a sad tendency by the mediocre to try to isolate New Zealand from the world, instead of engaging with it.

An Infrastructure New Zealand report says we are keeping up with infrastructure better than we might have thought from the grumbling. But the challenge of providing for the future remains.

I was astonished to learn that the quantity of our infrastructure has been keeping up with economic growth. Your paper almost certainly has daily reports of inadequacies in the land transport system (not to mention your travel being delayed by congestion), the energy system, and hospital and school buildings while at least once a week it probably draws attention to a telecommunications breakdown or failures in the three waters systems (more often if you live in certain cities). Similar incidents for airports and seaports pop up too.

Grumbling aside, the economic history of New Zealand illustrates why these shortages happen. The international Great Depression of the early 1930s first hit New Zealand when public works laid off workers because there were no funds to pay them. During the Second World War resources were diverted from building infrastructure to fighting (thereby causing the electricity shortages with the blackouts of the early 1950s). When Robert Muldoon hit a fiscal crisis shortly after coming to office in 1975, he immediately cut public investment. In each case economic difficulties meant we shortened our investment horizon, focusing on the present at the cost of providing for the future. A decade later Rogernomics couldn’t work out how to commercialise some of the infrastructure – privatisation did not always work for roads, say – and left a muddle. This time commercialisation shortened the time horizons of investment.

Unfortunately, we have a statistical series for infrastructure only back to 1990 so I cannot turn the previous paragraph’s qualitative story into a quantitative one: the data series since has been based on Statistics New Zealand (SNZ) data and the analysis was provided by the Infrastructure New Zealand (INZ) (here). It shows infrastructure growing more slowly until about 1997, stagnating through to 2004, expanding to 2013 and then stagnating (keeping up with GDP growth) thereafter.

Before reporting the results, I need to say something about the measure which SNZ uses for all its capital stock estimates. It takes the value for assets in one year, adjusts them for inflation, depreciates them for wearing out, and adds in new investment.

The method of depreciation is tricky and may explain part of the almost paradoxical findings. I avoid the technical issue with an illustration. Recently a 132-year-old Wellington fresh-water pipe collapsed. The depreciation formula will value the still functioning pipe as zero. When it ruptures it will be replaced by a new one, the cost of which will be added to the value of the infrastructure. Presumably that will not affect the availability of the water to users (except for fewer interruptions). The new pipes’ contribution to GDP productivity is near zero.

The cost of extending infrastructure may not always be as productive as the existing infrastructure. Doubling a road width is likely to cost more than the original cost of the road. Sometimes it may be. The replacement of the copper wire network with the broadband one created possibilities which would have been beyond the ken of Alexander Bell.

Even so, the new infrastructure may add to human welfare without adding to material productivity. We benefit from less traffic congestion, children benefit if the classrooms are not damp, increasing earthquake resilience is of little value until one day the big one happens. 

These valuation issues may explain the increasing grumbling, despite the effort of infrastructure growth keeping up with economic growth. So I proceed cautiously, using the data to provide insights which are reasonably robust in these issues. I am going to the use capital to annual GDP provided by INZ as percentages. A constant percentage means infrastructure has been growing as fast as material output, a rising one that the capital stock is increasing faster than GDP. I compare 1990, the first year available, with 2022, the last year. I’ve summarised my investigations in the following table.

Infrastructure  Capital Relative to Annual GDP

Infrastructure Sector (Ownership) 1990 2022 Change

Road Transport (Public) 14.3% 18.6% 4.3%

Rail, Water, Air & Other Transport (Public) 2.3% 2.2% -0.1%

Public Administration & Safety (Public) 8.1% 8.7% 0.6%

Social Housing (Public) 7.9% 3.3% -4.6%

Other Public Capital (Public) 1.9% 2.8% 0.9%

Preschool & School Education Mixed88%) 9.5% 7.6% -1.9%

Tertiary Education (Mixed92%) 2.2% 4.5% 2.3%

Hospitals (Mixed91%) 5.3% 3.9% -1.4%

Water, Sewerage, Drainage & Waste Services (Mixed68%) 5.1% 9.2% 4.1%

Electricity & Gas Services (Commercial) 14.6% 12.9% -1.7%

Telecommunications Services (Commercial) 6.9% 5.7% -1.2%

TOTAL 78.1% 79.4% 1.3%

A warning about terminology. You’ll have to look up SNZ definitions to see what exactly each sector covers. Second, I have listed the sector ownership. ‘Commercial’ may be misleading for it includes publicly owned (or partially owned) trading enterprises (such as Meridian Energy, Genesis Energy and Mercury Energy). There is also mixed ownership (according to SNZ definitions) in some sectors – the number after the ‘mixed’ is the proportion of the infrastructure which is publicly owned. ‘Public’ includes both central and local government. (Phew! about definitions.)

What we see in the table is that infrastructural capital has grown slightly faster than GDP over the 32 years. When judging we should remember that, as hinted in the second paragraph, we may have had an infrastructural deficit in 1990. In which case we may not have caught up.

The interest in the table might be the change in the composition of the infrastructure. I was surprised that the three waters sector’s infrastructure has increased substantially, as has that of the land transport sector. That is not the impression that the grumbling gives. The infrastructure of the commercially owned sectors of electricity and telecommunications have increased more slowly than GDP. Each of these potential paradoxes needs to be investigated.

Less surprising is that social housing has decreased significantly given the policies towards it that governments have been pursuing. (There is no information here about the stock of privately owned housing.) The relative reduction in core education probably reflects slow growth in the age groups, but possibly also that school buildings are not being upgraded. On the other hand, tertiary education has been adding to its buildings.

The healthcare sector is more perplexing. Healthcare spending has been increasing relative to GDP, but the buildings and equipment they use have not.

I leave investigating these issues to others and other occasions. My point is that the INZ report Build or maintain? New Zealand’s infrastructure asset value, investment, and depreciation, 1990–2022 is a useful contribution to our understanding of the way the economy has been developing … and not developing.

It and the other work of INZ demonstrates that thinking systematically about infrastructure is vitally necessary for New Zealand’s development. The politicians agree and are prioritising it.

The Minister for Infrastructure, Chris Bishop, has just announced his government’s policy which includes an Infrastructure Commission to further embed the sector into the government system. Having set out the policy he said that it should be bi-partisan because it involved the long term. A bit like the Red Queen – policy first; consensus after? The other political parties were not amused. Perhaps the minister should involve them in establishing the membership of the new commission.

Hardly anyone says what are ‘the principles of the treaty’. The courts’ interpretation restrain the New Zealand Government. While they about protecting a particular community, those restraints apply equally to all community in a liberal democracy – including a single person.

Treaty principles were introduced into the governance of New Zealand by the Treaty of Waitangi Act 1975 whose purpose was ‘to determine whether certain matters are inconsistent with the principles of the Treaty.’ However, the Act did not state what those principles were.

The Court of Appeal had to define the principles in the case of New Zealand Māori Council v Attorney-General (1987) (a.k.a. the ‘Lands’ case or the ‘SOE’ case) because they are in the State-Owned Enterprises Act 1986. The judges did not codify their principles, but a common summary of their conclusions is:

The Crown has the right to govern. The principles of the treaty ‘do not authorise unreasonable restrictions on the right of a duly elected government to follow its chosen policy. Indeed, to try and shackle the Government unreasonably would itself be inconsistent with those principles’.

The Crown has a duty to act reasonably and in good faith. The relationship is ‘akin to partnership between the Crown and Māori people, and of its obligation on each side to act in good faith.’ The judgment draws parallels with ‘our partnership laws’.

The Crown has a duty to protect Māori interests. ‘The duty of the Crown was not just passive but extended to active protection of Māori people in the use of their lands and waters to the fullest extent practicable.’

The government should make informed decisions. The Court said that in order to act reasonably and in good faith, the government must make sure it was informed in making decisions relating to the treaty. That will ‘require some consultation’.

The Crown should remedy past grievances. ‘If the Waitangi Tribunal finds merit in a claim and recommends redress, the Crown should grant at least some form of redress, unless there are grounds justifying a reasonable Treaty partner in withholding it – which would be only in very special circumstances, if ever.’

Subsequently the Waitangi Tribunal endorsed these principles.

In 1989 the New Zealand government responded to the Court of Appeal with a set of principles. No subsequent government has modified them. They were:

The government has the right to govern and make laws. (The kāwanatanga principle)

Iwi have the right to organise as iwi, and, under the law, to control their resources as their own. (The rangatiratanga principle)

 All New Zealanders are equal before the law.

Both the government and iwi are obliged to accord each other reasonable cooperation on major issues of common concern.

The government is responsible for providing effective processes for the resolution of grievances in the expectation that reconciliation can occur.

As lawyers have pointed out, Article 3 of Te Tiriti applies to all New Zealanders. If the term ‘Māori’ is replaced by ‘New Zealander’ and the term ‘iwi’ by ‘voluntary associations’ the above principles are those intrinsic to the governance of a civilised liberal democracy.

 Suppose every Māori was to disappear (perhaps a virus wiped out everyone with a Māori gene). Which of these principles in its generalised form would become redundant? I hope none of them. While their effect is to restrain the government in its treatment of a particular group (Māori), in a liberal democracy those restraints apply equally to all – including the minority of one person. They are generally not platitudes; many hardly apply in Putin’s Russia.

The implication of Article 3 is that individual Māori do not have a special status. But do iwi, Māori collective institutions? (Because Māori have a right to develop, today’s ‘iwi’ covers not only the tribes which were their social organisations in 1840 but more recently evolved ones, such as the Māori Women’s Welfare League and the Māori Urban Authorities.)

Do the treaty principles give iwi special rights? Yes and no. They say that the Crown is duty bound to consult iwi. But consultation is an integral element of a liberal democracy. Iwi are fortunate that their right is stated more explicitly.

I’ve discussed the issue of co-governance here. Even as Prime Minister, Chris Hipkins said he did not understand what it means. Public discussion has muddled self-government, partnership, co-management and co-governance. The three earlier notions are integral to the running of a liberal democracy.

While Māori claim kaitiakitanga (guardianship) rights over community and public property, so do a lot of my green friends. They are examples of taonga katoa, discussed below.

I am not sure whether preservation and promotion of Māori culture is a Tiriti issue. Any civilised society would do that. (The same applies to Pasifika culture, given Aotearoa New Zealand’s share of those peoples.) Te reo is discussed below.

So how are we to judge ACT’s proposed Treaty Principles Bill? The bill is not yet before Parliament, but ACT’s manifesto said it would define the principles of the treaty as:

The New Zealand Government has the right to govern New Zealand.

The New Zealand Government will protect all New Zealanders’ authority over their land and other property.

All New Zealanders are equal under the law, with the same rights and duties.

The proposal looks like an attempt to redefine Te Tiriti o Waitangi. Evolving the interpretation of past events is organic; putting one in statute is not; it fossilises it. At a deeper level, it is not unusual for an authoritarian state to reinterpret history to suit itself. (Witness Putin about the history of the Ukraine.)

While its principles 1 and 3 are consistent with those of the Court of Appeal, the ACT proposal omits other key treaty principles. One is uneasy that we should pass a law which seems to repeal so casually the deliberations of the courts on such weighty matters, especially as those that underpin a liberal democracy.

ACT’s Principle 2 is narrower than the principles set out by the Court of Appeal. It is a limited interpretation of the second article of Te Tiriti, reflecting the neoliberal view that it is only about private property rights. Māori had few of those in 1840; property rights were held by the community, much to the frustration of Europeans who wanted to acquire land. Neoliberals object to community ownership. (Elinor Ostrom was made a Nobel Laureate in 2009 for her work explaining how such collective ownership can work very effectively.)

Moreover, the second article of Te Tiriti covers far more that what we conventionally think of as private property. We can see that from the evolution of the drafts of the treaty. Up to what is called the ‘English version’ there was a list – ‘Lands and Estates Forests Fisheries and other properties’. The text signed on the treaty grounds jumps to ‘ratou wenua o ratou kainga me o ratou taonga katoa’– ‘their lands, their villages and all their treasured things’. (Because translators would not make that jump, I am of the view there was a revised English draft from which Te Tiriti was translated; it probably ended up in Colenso’s – now lost – papers.)

‘Taonga katoa’ is a very strong term – much more encompassing than ACT’s ‘other property’. For instance, the courts have ruled that ‘te reo’ is one of those taonga. Had this been raised with Māori on 6 February 1840 – unlikely because people didn’t think that way then – the Māori response would probably have been ‘he aha to tikanga?’ – ‘what do you mean?’ Ask it today, the response is a very positive ‘āe, āe’.

My thinking is greatly influenced by Edmund Burke and, indeed, Friedrich Hayek when he is not a neoliberal. They saw organic development at the core of social progress. Sometimes the government has to accelerate or enable it. It should avoid retarding it or fossilising it. That is what the ACT proposal does.

In arguing that the ACT proposal retards organic development and undermines democratic principles, I am not arguing that the party is inherently reactionary or authoritarian. Rather, I don’t think the proponents of the bill have thought these issues through. We shall see how they respond when such issues are drawn to their attention. One hopes they will reaffirm the Court of Appeal’s principles of the treaty which underpin a liberal democracy and adopt a more accurate historical account of the drafting of Te Tiriti and the subsequent organic evolution of its interpretation.

The paper on which this column is based has been checked with various legal authorities.