Productivity in New Zealand

Former Secretary of the New Zealand Treasury Graham Scott gave an address to the NZIER's 2008 AGM on the topic of Productivity in New Zealand (pdf). He had a number of interesting things to say. Scott thought it time to reflect on the state of applied economics in New Zealand with his focus being on public policy. His basic message being that there has been some diminution of the place of economics in the development of public policy. He sought to explain why. The following is based on Scott's speech notes for the address.

Part of the reason, in his view, is ideology. The present government, Scott contends, includes a number of individuals for whom the philosophical liberalism which lies beneath much economic methodology is unacceptable. Scott notes that

Economics' primary mode of analysis is to examine how people and firms exercise free choice in the context of their incentives. It is therefore concerned to examine what is happening in the markets.

He says

For people on the left – at least the old left – the market is chaos and economists are suspected of promoting it and tolerating unacceptable behaviours and market outcomes. Leftists – at least of the statist variety – see the market as a human creation that can and should be supplanted with a superior form of economic organisation overseen by the state.

It could be pointed out that this is true not just of those on the left. Mercantilist type thinking occurs among many groups on the political spectrum.

Scott goes on to say

... while the economic method has always provided for scepticism about markets it also provides for scepticism about the benefits of state control over markets. Its analytical methods seek to evaluate the net benefits of any adjustment to the role of the state in the markets by weighing up the risks of government failure alongside the risks of market failure. While economists as individuals have their philosophical and political preferences – and are themselves subject to incentives - the examination of the role of the state in promoting and destroying wealth is core business for economists.

Scott notes that the current government began with a preference for state action over the market and along with this came a rejection of the economic method and its archetypal solutions. This, in Scott's view, is partly ethical disapproval of behaviour that economists are dispassionate about.

Scott lays out some consequences of these ideological preferences. He notes that

...the economic paradigm has given ground to a paradigm of central political control in which ministers take hands-on charge of areas of state activities that oversee aspects of the private sector or of state sector service delivery. The act as discretionary managers in effect and establish subordinate organisations to do activities called planning and coordination in a whole of govt framework as a kind of secretariat to the minister. Some of the characteristics of this paradigm are:

• Political appointments to governance and advisory positions with attention to political loyalties
• An increase in direct but non-transparent intervention by ministers into the governance and management of public organisations
• Belief in central coordination and direct control as the solution to problems rather than decentralised solutions
• Strong disbelief in the effectiveness of markets in allocating resources and managing risks and bias against private sector provision of public services, consumer choice and competition in the provision of services funded by government – notwithstanding the evidence as seen in Julian LeGrand’s recent book “The Other Invisible Hand” that choice and competition favour those who are disadvantaged and powerless.
• Preference for heavy handed regulation and public ownership over competition and light handed regulation to correct undesirable behaviours and outcomes in markets
• Utopian beliefs about the state and therefore inclination to expand it (surely Marxists and liberals find common cause in not seeing their visions of a good society compromised by excessive bureaucracy)

A government which is in the business of large scale redistribution, as the current one appears to be, will not according to Scott welcome advance from economists,

A government that wants to redistribute a lot of national wealth is not going to welcome advice from economists, which will be about incentive effects, dead weight losses and administrative costs.

I would add that by and large redistribution results in bad incentives, large dead weight losses and large administrative costs.

Scott continues by noting that the current government's approach to policy has resulted in damage to economic reasoning in policy circles.

But I suggest that the triumph of this new – or perhaps more accurately recovered – paradigm, has caused some collateral damage to economic reasoning in policy circles. And in at least a few significant areas of policy this has exposed weaknesses that might have been avoided with better economic analysis and is constraining the range of options for increasing productivity and national wealth.

Scott then gives some context to his observations by considering the object of increasing per capita incomes (expressed variously as catching up the Australia or the OECD average). He raises two insights about economic growth and productivity improvement. First, an economy’s long term growth rate is constrained by the rate at which it can accumulate and deploy new ideas that enable an economy to raise output faster than input. Second the richer you are, the harder it gets to produce high and sustained rates of growth. He then notes that New Zealand is we are making heavy weather of increasing productivity and growth and that the quality of institutions is a central explanation of difference in growth rates between countries, as institutions provide the basis for many of the drivers of productivity improvement. Institutions are rules and rights and processes that shape the environment around economic actors and New Zealand has work to do in this area. Scott argues that the institutions created by the coercive powers of the state should be the focus of attention in seeking better productivity.

Scott goes on to give a series of examples of case evidence to suggest that some institutions created by our state are creating needless burdens on national productivity performance by contrast with better feasible designs. His leads to a set of recommendations regarding economics and public policy,

Reinvestment in capability for economic analysis as an important input for superior public policy

Not arguing for hegemony for economics but for advice from that professional perspective to be received and considered along side other broad scale professional perspectives that can provide an integrated perspective across the policy silos that have been created.

There are broad issues about the appointments, roles, capabilities, professional and other accountabilities of official advisers that go beyond my scope here. More needs to be done to clarify that, if public servants are accorded the honour of being employed as advisers with privileged access to ministers, then there is a reciprocal obligation on them to produce high quality analysis to support that advice.

But to comment specifically on economic advice, I would recommend:

• Reinvesting in Tsy
  
• Restore the position of professional advisers in the cabinet decision processes
• Put Tsy back into high level regulatory policy from an economic development perspective – incidentally recent work by ministers on Rodney Hides Regulation Responsibility Act is a good example of a sound process. Those ministers may not agree with everything in the bill but they are giving it careful consideration and the process promises some consensus to address the regulatory overload.
• Rewrite the Public Finance Act to a best international benchmark standard for performance budgeting, monitoring and evaluation
• Embed Treasury’s mandate and obligation to provide analysis and advice on the long term economic interests of New Zealand and the tools and capability needed to do this.

This has implications for fiscal policy and public management

• Forget about hiring freezes etc and reinvest in the performance system so that it can be used to roll back low value activities incrementally and continuously.
• Augment the PFA’s FRA provisions with new principles about the size efficiency and effectiveness of the state
• Strengthen mandates and capability for monitoring and evaluation of all state sector activities and create a centre of focus for this activity

Approach the Australian Government with a proposed mandate and governance structure to expand the role of the Australian Productivity Commission to cover New Zealand

Mandate evaluations of the coordinating institutions that have been established (TEC; EC…) with a view to preserving only activities that are of proven value to the national economic interest

Ensure that competition policy is focused on the net benefits of an intervention from the perspective of national economic welfare against real world counterfactuals - not idealised ones or making value judgements about redistribution between corporate interests.

Transparency and official information:

• Remove all protections from routine performance information
• Ministries and others to present strategies for disclosure of performance information for review by relevant select committees and the central agencies
• SNZ to be given increased powers to decide on what statistical series regarding state sector performance it publishes and to get the information it needs to do this

Governance: Address the agenda of quasi constitutional issues that might, either in specific areas or perhaps more generally, address openly the clash between short term political incentives and long term wealth creation.

• RBA – as the prime example of success of this kind of design
• Appointments – set up an appointments commission which, like the SSC, presents recommendations for appointments to state organs on the basis of capability.
• Restore clarity and transparency around the role of ministers in relation to SOEs and Crown Entities

In conclusion Scott makes four relevant points,

1. Even if the deterioration in measured productivity data does turn out to be off the underlying trend of improvement we saw in the 1990s, public policy needs to stay seriously focused on the nexus of issues that explain productivity trends. There are strong theoretical and empirical reasons to believe that catching up gets much harder the closer you get to the frontier of innovation. We cannot afford the luxury of tolerating large inefficiencies in the sheltered sectors and the state in particular.
2. We do not need big new ideas – like swapping the current fashion for ‘libertarian paternalism’ for the intellectual corpse known as the ‘third way’ - but workman like application of world class methods to our situation as it evolves.
3. The tension in democracy between efficiency and equity; citizen rights and market freedoms is permanent. Great states resolve these tensions with technical and political skill.
4. The arenas for much of this political tension are the institutions of the state like the ones I mentioned. If we want a great economy then we must have great state institutions. We can do much better than this.

I'm guessing that Scott isn't after a job with the current government. The whole speech is worth reading.