Closing the Gap
Successive governments have repeatedly expressed their concern at our slide down the OECD economic tables and their ambition to see us climb back up again. But over the last few years, they have focused that concern more precisely; it is the growing gap with Australia that they now target. The present government has committed us to catching up with Australian living standards by 2025.
Identifying a target is commendable but that is the easy bit. Things get harder when we ask ourselves just how we are going to do it.
The starting point is to measure accurately just how wide the gap is. On the basis of comparative GDP figures, it is said that we would have to raise our incomes by over 30% in order to match Australian levels, or – in other words – the average New Zealand family would have to be $50,000 a year better off.
This is daunting enough, but the worse news is that these figures understate the problem. GDP figures include that sizeable proportion of our national output that is actually exported overseas to foreign owners whose stake in our economy is now proportionately greater than in any other comparable economy. If we exclude those repatriated profits and other payments to overseas owners, and count only that domestically produced output that we ourselves enjoy (as is done with the Gross National Product figures), we find that we would have to increase our output by nearly 50% to match Australian levels and that an average New Zealand family is actually $80,000 a year worse off than their Australian counterparts.
If we are to close and eliminate that gap, the frightening challenge is that we will have to make up ground while the Australians will actually be growing – by world standards – pretty fast. We will be chasing a train that is leaving the station at a rapid clip. So, how well are we placed to do so?
The early signs are not promising. The first thing we must recognise is that – as both economies look to emerge out of recession – the Australians have had a flyer. They have already moved smartly into growth mode, while we bump along on the bottom, still not sure whether recovery is really around the corner. The gap, in other words, is already widening as we speak.
The Australian recovery is a function, of course, of the greater economic stimulus provided by their government by comparison with ours – and that reflects not only the stronger starting point they enjoyed but also a different approach to economic management. We, on the other hand, have been largely content to let events take their course and to wait for the recovery of others to restore export markets to us.
Even more depressing is the fact that – even when recovery arrives – we seem determined to return doggedly to the self-same policies (and policy mistakes) which have seen us fall so sadly behind over the past 25 years. It is perfectly clear where we are heading – back to an obsession with inflation above all else, a total reliance on interest rates to regulate the macro-economy, and the destructive impact of an overvalued exchange rate on our productive economy.
We seem to be sleep-walking towards a complete re-run of all our mistakes and failures. The authorities shrug their shoulders; there is, we are told, nothing they can do. Those who – against all the odds – continue to produce our national wealth complain bitterly and warn of dire consequences, but their pleas fall on deaf ears. We are trying to catch the train while running on the spot.
The target set for us of closing the gap with Australia is laughable, and no self-respecting commentator should be heard to lend it respectability, unless we are prepared to take a hard look at what we must do to achieve it. Even then, even if we get everything right, it must be very doubtful that we can do much more than prevent the gap from widening further. Ministerial exhortations, endlessly worked over plans and strategies, constantly repeated targets, will not do the trick. What is needed is a fundamental re-think of macro-economic policy.
Everything we do should be focused on improving the competitiveness and profitability of our productive economy. That means that policy targets should be set in terms of competitiveness rather than inflation, and that interest and exchange rates should be allowed to do their proper job of striking a balance between the interests of lenders and borrowers (in the case of interest rates) and clearing our current account while achieving a satisfactory rate of growth (in the case of exchange rates). Inflation should be constrained by specific measures designed to address inflationary pressures – excessive bank lending on housing and the favourable tax treatment of housing amongst others.
A better economic performance is by no means unobtainable, provided we make the most of our advantages – political stability, a corruption-free and business-friendly environment, an educated and responsible work-force, huge natural advantages and great experience in producing the goods that the world’s fastest-growing markets will increasingly want. All we have to do is to avoid heading back to the dark ages.
Bryan Gould
17 November 2009
This article was published in the NZ Herald on 27 November.
Bryan Gould Speaks to UNESCO
Speech to the UNESCO General Conference By the Chair of the New Zealand National Commission Mr Bryan Gould
Tena koutou katoa kua huihui mai nei i tenei ra.
(English translation: Greetings to all who have gathered here today).
Mr President, Ladies and Gentlemen
In 1946, when UNESCO’s Constitution came into force, New Zealand was the second country to step forward to sign it. We did so, in the aftermath of a tragic conflict, so that the instinct for peace should take hold in the minds of new generations. So, with other founder members, we signed up for a future built on the life of the mind and the heart and the spirit – on education, culture, the sciences, and the free exchange of information and ideas.
Sixty three years later, New Zealand continues to support UNESCO’s goals. Both at home, in managing our own affairs, and in offering an example internationally and particularly in the Pacific sub-region, we try to demonstrate through our actions the value of UNESCO’s agenda for progress.
So, we are strong supporters of education for sustainable development and we have an active network of ASPnet schools committed to UNESCO’s values. In science, we focus on waiora, the Maori word for our sustainable fresh-water resources. The bicultural foundation of our country – Maori and pakeha – gives us a strong base to take advantage of the growing cultural diversity that enriches our society. And we continue to enjoy, and encourage others to emulate our commitment to, a free press and the free exchange of ideas.
What we seek is to lead by example, to cast new light on old problems, to think strategically, to change attitudes, to open minds, to know and understand more of ourselves and of others.
We like to think that New Zealand lives UNESCO’s ideals. We do so at what is another critical moment in the world’s affairs. The global recession may not be a disaster on quite the scale of the Second World War, but it should lead us nevertheless to re-affirm the great value and importance of what UNESCO stands for. The recession, after all, was the end result of a doctrine that said that all that really mattered was the maximisation of profits for the masters of the global economy.
We now know that we cannot entrust human progress to the tender care of the bottom line. That way lies not just economic crisis, but ecological degradation, social disintegration, and international conflict. Man is not just an economic animal. The lessons of the recession should teach us that the way forward lies – not with ever faster and less responsible consumption of material things by a small fraction of the world’s population – but with learning more about and responding better to our relationships with each other and with our planet.
A General Conference is inevitably concerned with budgets, elections, resolutions, organisational structures and processes. But we must never lose sight of UNESCO’s true purposes, and each of our individual decisions should be judged according to whether it advances or hinders the achievement of those goals. So, New Zealand, from our vantage-point in the Pacific sub-region – the sub-region most distant from Paris and covering the greatest number of countries and the largest geographical area, but a sub-region challenged not only by immediate dangers of which last week’s tsunami is a sad and destructive example, but also by longer-term threats such as climate change – has naturally been a consistent advocate for decentralisation. We welcome the report of the second task force review. But modalities are less important than people. We continue to be concerned at the damaging delays in recruiting professional staff to the UNESCO Office for the Pacific in Apia. There is no point in changing the structure if we cannot commit the resources to make it work. Similarly, we are concerned about the performance indicators proposed in the draft 35C/5. We are not convinced that these largely quantitative performance indicators will provide a meaningful assessment of the Organisation’s effectiveness. They may be easily measured but they tell us little about our real achievements; at worst, their adoption could lead to a diversionary goal displacement. We strongly encourage the Organisation to undertake further work on this issue. We continue to believe that working across sectors and themes is the way UNESCO should operate. The next Medium-Term Strategy UNESCO programme should, we believe, be organised around these intersectoral themes with a Secretariat that mirrors this structure. Two years ago, my predecessor delivered her speech to the General Conference while wearing a Maori cloak or korowai. I am similarly privileged today. The cloak that I wear has been gifted by the National Commission to UNESCO as a taonga or cultural treasure. It is a work reflecting the great skill of a traditional weaver who has brought together a range of materials to produce something of significance, value and beauty. It is, we like to think, a suitable metaphor for the role that UNESCO should and must play in tomorrow’s world.No reira, tena koutou katoa.(English translation: In conclusion, greetings to you all).
What’s Left for Labour?
Barring a miracle, and miracles seem likely to be in short supply, Labour will lose the next election. The question is not the survival of the Labour government, but the survival of Labour as a force in British politics.
Ensuring a positive answer to that question should be the sole preoccupation of Labour loyalists and activists between now and the election. A change of leadership is unlikely to make a real difference and should be considered only if it would.
The lost election, and the failures that preceded and caused it, are not solely the responsibility of Gordon Brown. Yes, he has failed to provide the requisite miracle, but the need for a miracle is the result of cumulative failures over nearly a decade and a half of lost opportunities and abandonment of principle.
It is ironic that we are told that the greatest threat of a leadership challenge now seems to come from the remaining standard-bearers of New Labour. The existential crisis for Labour is, after all, the end-state of the whole New Labour project. It is the end of New Labour, not a renewed New Labour, that is now needed; we can all have too much of a New thing.
But all is not lost. Political parties can and do recover from electoral wipe-outs. My own native New Zealand provides a good and encouraging example.
The New Zealand Labour government of 1984 confounded opponents and supporters alike by embarking on a ferocious revolution that saw New Zealand become the test-bed for a daring experiment in far-right, free-market economics. The electorate suspended judgment in 1987 and gave the Labour government a further chance; but by 1990, it was thumbs down, ushering in nine years of conservative government.
Many people felt that electoral defeat was not the most serious issue for Labour as it faced its future. The real problem was finding a way back to a role in New Zealand politics which would allow Labour to re-connect with supporters who had been confounded and felt betrayed by their party in government.
The abandonment by New Labour in Britain of what might have been expected of a Labour government was not nearly as dramatic or initially shocking as the policy reversal delivered by New Zealand Labour. But it was equally far-reaching and ultimately distressing to Labour’s natural supporters.
From the Iraq invasion to complicity in torture, from the obeisance to the rich to the faith in the infallibility of the unfettered market, from the infringement of civil liberties to the belief that spin mattered more than action, from the subordination of economic policy to the interests of bankers to the devaluing of the public sector, New Labour has dashed the hopes of Labour voters and distorted the political landscape. As in New Zealand in the 1980s, voters no longer know what to expect, or where to look if they are to secure the policy framework they want.
The good news is that, in New Zealand, the sense of betrayal and disorientation engendered by Labour’s performance in government was followed by a period in the wilderness but was not terminal. After nine years of opposition, Labour returned to office in 1999 and – even with the added challenge of a new proportional representation electoral system – then delivered a competent and well-regarded government which not only won two further elections but also restored sense and order to New Zealand’s political scene.
Even after an election loss last year, Labour remains the government in waiting. Voters know that, if they want a left of centre government, Labour will deliver. Even in opposition, Labour remains identified with left positions and attitudes and is widely seen as where voters will go when they tire of the new conservative government.
The leader of that nine-year Labour government was Helen Clark, recently identified by an opinion poll as the greatest living New Zealander. How did she manage to restore Labour’s fortunes and its rightful position as a contender for and deliverer of government?
The answer should surely be of some interest to those who might aspire to the leadership of Labour in Britain. What she did was to re-state Labour’s traditional values – compassion, social justice, an economy that serves the interests of everyone and not just a privileged minority, an inclusive approach to what it means to be a New Zealander in the twenty-first century.
Her government wasn’t perfect – what government is? But she not only restored a sense of what Labour stood for; she moved the agenda forward so that Labour values were seen as newly relevant to New Zealand’s current needs. Most of all, she carried the debate to her opponents and made the case for a left programme.
What British Labour now needs is a new generation of leaders who have a sense of the political legacy to which they are heirs and who have the courage and conviction to move that legacy forward. The British electorate will want to punish Labour for the failures delivered in the name of that short three-letter word with the capital N; but they will respond to a party that gives them a real choice and that knows what it stands for.
Bryan Gould
27 September 2009
This article was published in the online Guardian on 3 October.
Learning the Lessons
As the world-wide recession seems to be bottoming out, one question is being asked with increasing frequency and urgency. Have we learnt the lessons so that it will not happen again?
The answer – at least in the US and the UK – is not a reassuring one. As the hard-pressed taxpayer, already burdened with the threat to homes and livelihoods, is left to pick up the bill for market failure – a bill in the billions which will not be paid for years, not to say decades – those whose recklessness and greed caused the crisis have already returned to the bad old ways.
We see the same outrageous bonuses, the same disregard for prudence, the same confidence that the price of failure will always be paid by someone else. It is almost as though the publicly financed bail-out has provided the fat cats with a renewed belief in their own infallibility, by convincing them that they will always be protected because they are too big and too important to be allowed to fail.
In New Zealand, where the financial sector is too small to exhibit these attitudes, we have nevertheless seen our own somewhat paradoxical response to market failure. It might have been thought that, in an economy where public finances had been unusually well and prudently managed over recent years, the public sector would be the last place that would be required to bear the brunt of recessionary retraction.
In other countries (notably Australia), and in line with the revival around the world of Keynesian insights into how to respond to recession, the public sector has been seen – not as the problem – but as an important part of the solution. We, however, seem to have become obsessed with the size of the government deficit, which is still relatively low in historical and international terms, with the result that the salami slicer has been applied with very little discrimination across the whole range of public spending.
No one can cavil at an increased drive to ensure value for money in public spending. The suspicion must remain, however, that the recession has been a not unwelcome excuse to rein back the public sector on ideological rather than economic grounds.
There is, however, a more significant respect in which we seem to have decided not to apply the lessons we should have learned. We should not forget that we have been in recession since the end of 2007 – long before the financial crisis broke. That home-grown downturn was the direct consequence of the policy directions we had been following for 25 years having finally run into the buffers.
Inflation then was still enough of a worry to lead the Governor of the Reserve Bank to keep interest rates at an internationally very high level. That in turn, through pushing up the exchange rate, had destroyed the competitiveness of our industries, created a current account in serious imbalance, increased our need to borrow to finance the gap between what we earned and what we spent, pushed up the exchange rate and stoked inflation still further as “hot” money flowed in to take advantage of the high interest rates, and so on round an increasingly vicious circle.
As we contemplate the post-recession scenario, those fundamental problems are no nearer solution. Indeed, some are a good deal worse; the overvalued dollar is destroying our productive economy with every day that passes. Our only response to these pressing problems seems to be that “there is nothing we can do.”
But there are things we can do. We could acknowledge that the strategy of defining macro-economic policy in exclusively monetary terms, and of directing the whole force of that policy to the single goal of controlling inflation, using a single instrument in the hands of a single unelected official, has failed – both as an effective way of controlling inflation, and in terms of its disastrous impact on our overall economic performance.
If we want to do better, and in particular, if we want to raise our poor productivity levels, we have to do things differently. If we go on with the same policy prescriptions as we have applied for the last 25 years, we will get the same disappointing results as we have endured over the last 25 years.
What is needed is a fundamental shift in perspective. It would mean, in line with the revival of Keynesian thinking, re-defining macro-economic policy so as to include the whole range of fiscal as well as monetary measures. It would mean setting the goals of macro policy (including interest and exchange rates) in terms, not of inflation, but of competitiveness, as the Singaporeans do. It would mean, rather than clobbering the whole economy with a poorly focused counter-inflation strategy, continuing the battle against inflation with specific micro measures directed at defined inflationary pressures, such as excessive bank lending and the favourable tax treatment of housing, and encouraging saving by strengthening the incentives to save.
It probably won’t happen. It is amazing that an orthodoxy that has been so thoroughly discredited by experience still has such a hold on official thinking. The government might be encouraged, however, to undertake an “agonising re-appraisal” by the thought that a change of tack might produce a better outcome, not least for their own pet preoccupation. Nothing, after all, would do more to get the government deficit down in a hurry than a newly buoyant economy.
Bryan Gould
26 September 2009
This article was published in the New Zealnd Herald on 1 October.
Bonuses – for Good or Ill?
Eyebrows and ire were both raised by last week’s reports of the huge bonuses – contributing to even bigger remuneration packages – paid out to the executives of some of our leading companies, even when those companies had seen profit margins fall substantially. Nothing more strongly suggests that the lessons that seemed such a clear legacy of the global financial meltdown just a few brief months ago have been quickly and conveniently forgotten.
Even the justification offered by the spokesman for the Institute of Directors was redolent of a distinctly pre-recession complacency. “If we are to attract the talent we need,” he solemnly intoned, “we have to pay salaries to match those paid in the rest of the world.” It’s a wonderful thing, the global economy; it requires us to push up New Zealand’s top salaries in an attempt to match world levels, but at the same time requires wages for ordinary employees to be driven down to the benchmarks set by the lowest-wage economies.
The supposed need to pay a top executive 100 times the income of his skilled employees is a self-serving nonsense produced by a small charmed circle who claim the right to set their own (and their mates’) pay rates. But the bonus culture which seems to have emerged unscathed from the recession is objectionable, not just because it produces scandalous inequities in terms of total remuneration, but because it is seriously deficient as a means of producing better economic performance.
The payment of very large “performance” bonuses is, we should note, a feature of a peculiarly Anglo-American business culture whose quasi-religious faith in the infallibility of market forces should surely have been dealt a major blow by the implosion of the last year or so. But the case against it rests on sound principle and practice rather than ideological preference.
I have had personal experience from both sides, as an executive and a director, of performance bonus schemes. On the basis of that experience, I believe that they promote attitudes that are the very antithesis of those we need.
The theory is that, if executives have “skin in the game” (or any of the other macho phrases used to justify the practice), they will try harder and produce a better performance. The reality is, however, that bonus schemes encourage the very deficiencies which have bedevilled our economic performance over a long period.
First, they engender a focus on the short-term at the expense of the longer-term health of the enterprise. “Short-termism” is a well recognised affliction of Anglo-American economies; it leads to cost-cutting and profit-taking over a short time horizon as alternatives to what we really need – investment, building new capacity, productivity improvements and strategic perspectives.
Secondly, bonus schemes often distort performance, diverting attention from the issues that should really be addressed in favour of those which happen to be relevant to the bonus. Because many of the factors that determine a company’s performance are beyond the capacity of an individual executive to influence – macro-economic conditions are the most obvious example – they either have to be discounted, or applied even though it is clearly irrational to do so.
The result is that boards usually either make a broad judgment as to what constitutes good performance in given circumstances, without reference to the factors (like a recession) that have really determined performance, thereby destroying the fiction that performance evaluation is based on measurable and accurate data, or they substitute for their own judgment a set of criteria which at least have the merit of being measurable, even if they are seriously irrelevant.
If they take the first course, the “performance” that is allegedly being measured all too often becomes nothing more than a reflection of whether or not the board feels strong enough to risk alienating the executive by withholding a bonus or part of it. That seems to have been the story of the bonuses reported here over the past week or so.
If they take the second course, and pretend to be measuring performance accurately according to quantitative criteria, the danger is that the executive focuses on the bonus criteria, even if they are barely relevant to any sensible judgment of good performance.
The issue of whether or not a bonus is paid, and how much, can also be destructive of a good relationship between governance and management. Some boards will purport to be able to measure performance to the last percentage point. An executive who has done well may well feel cheated if the board says that only 75% of a bonus is to be paid. And if the bonus scheme extends to a larger group of executives, the issue of who gets what percentage of bonuses (bearing in mind that such information rarely stays confidential) can engender feelings of resentment and unfairness – hardly conducive to good human resource management.
There is a much better practice, to be found in better-run economies than our own, which we should emulate. Top executives should be paid a proper rate for the job (and I have no objection to high salaries per se) on the assumption that, having been appointed, they will deliver a satisfactory performance. A less than satisfactory performance should be dealt with as a performance issue. An exceptional performance – above and beyond the call of duty – should be rewarded with a genuine, but one-off, bonus.
This would require many employment contracts to be re-negotiated, not necessarily with a view to bringing total remuneration down, but with the aim of removing many of the deleterious effects of the current practice, and producing more transparent and defensible arrangements. It is up to boards (and shareholders) to take this more sensible approach.
Bryan Gould
30 August 2009
This article was published in the New Zealand Herald on 3 September, and an amended version appeared in the online Guardian on 5 September.