The State of the State in New Zealand

At the website of the The New Zealand Centre for Political Research the former Secretary of the New Zealand Treasury, Graham Scott has written recently on Some Concerns about the State of the State in New Zealand. He writes about the ever increasing influence of politicians in the New Zealand economy and society more generally. He points out that the state is becoming more involved in many areas. His list includes,

Our Universities are to be guided and planned by a politically appointed Tertiary Education Commission that is to be brought into the inner circle of – until now – apolitical policy advisers. The primary industries are to be fed taxpayer resources to pursue government initiated strategies for breakthrough technical innovations. Air New Zealand has been partially nationalised and then criticised for not conforming to government policies that are not in law. The Government is trying to prohibit shareholders in Auckland Airport from selling their shares to a Canadian pension fund – scarcely a threat to national sovereignty. The rail lines were nationalised – or more accurately the massive costs of maintaining them were - and there is talk of further nationalisation. Spending under the public health system has been tilted strongly towards public providers that are subject to detailed ministerial intervention. A commissioner has been appointed in two DHBs.

He also notes that

Directors of state enterprises are complaining about the level of political intervention and the balance of political connections and professional skills in choosing boards has shifted towards the former. The State has returned to the banking business.

More than 10 years ago Spicer, Emanuel and Powell (Transforming Government Enterprises: Managing Radical Organisational Change in Deregulated Environments (1996)) warned of the possibility that the government would want to take control of some firms again. They wrote,

[a]lthough New Zealand's SOE legislation is a paragon of clarity and simplicity, what can be expected of corporatised entities is limited as the SOE model on which corporatisation is based is itself inherently fragile and unstable.

They argue that there are two pressures on SOE's: the first being towards privatisation since the productivity and efficiency gains achieved by SOE are in danger of being eroded over time. Privatisation is a way of both cementing in the commercial orientation of enterprises and wringing out further gains resulting from the high powered incentive and control mechanisms which can be bought to bear in privately owned and publicly traded companies. The second pressure on SOEs is towards being pulled back into the public sector where social and political objectives can be more readily be meet. What we have seen under the Clark government is the second of these pressures being very strong. But not for socially useful reasons. Most interventions seem to be more politically motivated.

Scott continues by noting

This pattern of deeper political control was signalled early and has been implemented. So we are headed for an election debate not just about the usual tussle over policy settings but also about whether this expansion of state influence is desirable or whether it is undesirable.

On whether is this is economically desirable or not we have to ask when is government control and production preferable? As a general guide, Hart, Shleifer and Vishny ("The Proper Scope of Government: Theory and an Application to Prisons", Quarterly Journal of Economics, 112(4): 1127-61, November 1997) argue that the case for government provision of goods or services is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant and when corruption in government procurement is a severe problem. It has been argued that the case for government production is strong in such services as the conduct of foreign policy, police and armed forces. The case can also be made reasonably persuasively for the case of prisons. The case for private sector provision is stronger when quality reducing cost reduction can be controlled through contract or competition, when quality innovations are important and when patronage and powerful unions are a severe problem inside the government.

Its not clear that the government's interventions have been in areas where the Hart, Shleifer and Vishny arguments would suggest the government should be involved. Banking, for example, is not a area where cost reduction come at the expense of quality, where innovation is unimportant or where there are any problem with government procurement. So why have the government owning a bank? Also government involvement in Air New Zealand is hard to justify on these grounds. As noted above, the case for private sector provision is stronger when quality reducing cost reduction can be controlled through competition, and the airline industry is very competitive, when quality innovations are important, and we want a high quality and innovative airline industry, and when patronage and powerful unions are a severe problem inside the government, which are things we wish to avoid with an airline. Here private provision makes sense.

Scott also makes the important point that

It is also important to continue the search for more stable and predictable policy frameworks where the role of the state is prescribed and procedures defined for the use of its powers of intervention. Examples are the fiscal responsibility provisions in the Public Finance Act, The Reserve Bank Act, the State Owned Enterprises Act and the Commerce Act. New rules to stabilize the share of the state in the economy and impose a national benefit test on regulatory powers in the manner of the Regulatory Responsibility Bill before the Parliament would also help to establish a sounder basis for economic policy than the haphazard intervention of ministers with short political fuses. These practices typified the Muldoon administration and are in evidence again today as for example with the intervention of the Auckland Airport.

Having well defined and enforced rules as to when and how the state can use its powers of intervention and coercion are needed not just to ensure an efficient and growing economy. But perhaps even more importantly they are needed to protect our individual freedoms from abuse by the state.