How much is wealth inequality to blame for society’s ills? BTW NZ is relatively unequal
One of the earliest ideas behind BigCake was that wealth is relative – if NZ wasn’t becoming less wealthy (or if you like, poorer) compared to the nations we usually liked to rate ourselves against, then no worries, no need to catch Australia by 2025.
A slightly newer idea was that wealth alone wasn’t a great way to measure how we’re doing as a country. A more accurate state of the nation would have to include life style factors such as the environment, education, health etc.
Economic growth is a means to an end, not just an end. And the end?…maybe just being happy.
And just arrived on the BigCake agenda is equality, mostly based on the book “The spirit level – Why equality is better for everyone”.
The guts of this book is that wealth inequality is tearing some Western societies apart. The greater the difference between rich and poor, the greater the problems such as crime, obesity, smoking, drinking…
The scary thing here is that NZ, relative to many Western countries, is a very unequal society.
Of the 23 nations the authors look at, NZ has the 6th highest income gap – as measured by the difference between the richest 20% of citizens and the poorest 20%. Worse than us were: Australia, UK, Portugal, the US and Singapore (with the biggest difference).
The book’s big weapon is a series of graphs that show the relationship between income inequality and a bunch of ‘bads’ such as health problems and social issues. (For the wonks, the graphs have regression lines). Basically countries with high levels of inequality are likely to have high incidences of health and social problems.
And mostly this is true of NZ.
Of course the opposite is true also –countries with low levels of inequality (such as Japan and the Scandinavian countries) enjoy better health and so on.
A lot of the time the ‘bads’ of the poor get dismissed as the result of poor housing, poor diets etc, so fix these and you’ll fix the big issues.
The challenging bit of “The spirit level” is the claim that this won’t work because they are symptoms not causes. “The problems in rich countries are not caused by society not being rich enough…but by the scale of material differences between people within each society being too big. What matters is where we stand in relation to others in our society.”
What corrodes society is high levels of inequality. The active ingredient at work here is the way we humans rate and compare ourselves. The thing that causes us greatest stress is being evaluated by others – what we wear, where we live, what cars we drive…
And how we measure up in these tests mostly depends on how much money we have.
As theBigCake moniker implies, I’m not much into a redistributive fix, but this is food for thought.
Anyway, still working my way through the book.
Expect more posts on inequality.
Equality and a holiday
Going to be in Samoa with family for a holiday for next eight days. BigCake is not completely going to rest – he’s taking a copy of “The spirit level – Why equality is better for everyone” with him, so expect posts (perhaps during next week) on equality.
The authors ask: How is it that we have created so much mental and emotional suffering despite levels of wealth and comfort unprecedented in human history?
Should be a fun read.
Teachers need lesson on comparative wealth in pay claim
The Post Primary Teachers’ Association says, in support of its latest pay claim: “After 15 years experience, a NZ secondary school teacher’s salary is 17% lower than the OECD average.”
Ummm that’s roughly how much our national gdp per person is below the OECD average.
I think the nurses ran a similar argument a year or so ago.
The PPTA’s complaint is a bit like Zimbabwean teachers complaining that their salaries are 0.5% of the OECD average.
You need to put pay in the context of overall national wealth. By and large you get paid what your country can afford.
BigCake’s not disagreeing that teachers shouldn’t be paid and valued more – they have a critical part to play in lifting NZ out of its economic mess.
But till the economy starts growing to a meaningful extent, any pay rise they get has to come at the expense of someone else.
If ambition was sales – the unfulfilled dreams of the IT sector and how the export growth debate has moved on
This post started out focusing on the lack of ambition of our businesses and politicians, but noting one honourable exception – the Kiwi IT sector.
That led to BigCake wondering what has become of all this IT ambition. Unfortunately not much, from a national big-picture perspective anyway. For sure, there’s heaps of IT businesses whose results match their ambitions, but I’d guess there’s an equally big heap where reality has fallen short.
That sort of lead to the question: why’s that? Is our IT sector a bunch of dreamers or is something else going on?
And that got me thinking about how the debate regarding what’s holding our exporters back has changed in the last decade or so.
Anyway, as mentioned BigCake has been a bit obsessed by a lack of ambition around the Kiwi shop which just seems at odds with our pioneering past, though the more he thinks about it, not so much.
One group of Kiwis not so inhibited is the IT sector. What’s happened in this sector (with its abundance of dreams, energy and ideas) brings home the magnitude of the problems facing globally ambitious Kiwi companies.
If ambition was sales…
Latest export sales stats show the sector has been going backwards from $1.6 billion in 2006/07 to $1.4 billion in 07/08. Domestic sale increased a bit over that latest period.
As a result, you have to wonder whether our leaders have now given up on IT, and other high-value sectors, because they’re too hard and instead have gone and put most of our eggs back in the agriculture/commodity basket.
It’s the path of least resistance, but it’s also a risky one as the last 50 or so years have shown.
Back in 2003 the ICT taskforce came out with a set of targets for the industry to achieve by 2012, including:
• More than trebling the number of employees to 125,000
• More than doubling the sector’s contribution to gdp to 10%
• A 625% increase in the number of $100m plus IT companies to 116.
To get an idea of how big a leap the last one was, there were only 15 companies in the $50 – $100m bracket at the time. Just 16 had already made it. I think this target was later (sensibly) modified to be less focused on a number of companies and more on the 10% of gdp target.
Anyway, they’re not going to happen.
For the taskforce these targets were not aspirational – the collective wisdom of some of the brightest minds in the ICT sector (Peter Maire, John Blackham, Ian McCrae…) was that it could be done…provided there was a “serious commitment to change”. Which of course never happened.
The NZ Institute’s latest report “A goal is not a strategy” also goes into this issue of our inability to ‘walk the talk’.
It’s interesting to compare what the ICT Taskforce saw as the constraints back in ’03 with what the institute now sees as the problems holding back high-value sectors like IT (acknowledging they’re got different approaches).
BigCake sees the changed diagnoses as a sign of how the export support debate has moved on.
The issues, as the taskforce saw them, were:
1. The shortage of commercialisation skills and experience to go global
2. The supply of appropriately educated graduates. The taskforce was particularly worried about the need to “inspire and engage with tomorrow’s ICT talent”.
3. Celebrating our ICT heroes
4. The regulatory environment.
For sure, they were big problems back in ’03 and in the main, are still so today. However, in today’s debates on how to grow exports, the taskforce’s constraints seem a bit self regarding, internalised and maybe naïve.
Are they really the heaviest anchors on the ICT sector’s ambitions now, or even back then? Would a 2010 taskforce consisting of Rod Drury, Sam Morgan etc produce a completely different the set of constraints?
Dunno. Let me know.
In a “Goal is not a strategy” the NZ Institute has come up with alternative diagnoses for sectors like IT that reflect where BigCake thinks the export growth debate has gone in the last couple of years (or at least gone in his head).
I’ve posted on this shift, or the need for it, before while looking at the work of people like economic geographer Philip McCann.
The guts of what the institute is saying is this: “Much more effort is required by New Zealand to establish the basis for success of wealthy small countries; that is having large exports of differentiated products and services.” (eg. IT ones)
Its list of constraints on achieving this is:
• Size and distance – “Other countries have implemented policies to help domestic businesses overcome the size and distance barrier challenge. New Zealand has not pursued the range of policy initiatives that other countries have, and all of these countries have been more successful in growing differentiated exports.”
The institute has looked at the support countries like Singapore, Korea, Denmark, Australia and Israel give their exporters to overcome their size and distance problems. We give financial support, but not R&D tax credits or exemptions, skill development help and we don’t do industrial park development.
• Infrastructure – “New Zealand scores relatively poorly on measures of infrastructure development, placing 35th in the world with the quality of roads, railways, and electricity ranking worse than the OECD average.”
• Exchange rate policy – while a floating exchange rate provides commodity exporters with a natural hedge, it is not so good for sector like IT. “Exports are usually priced in the currency of the destination market so the consequence of the exchange rate rising and falling for non-commodity exporters is that earnings fluctuate.”
• Picking winners – encouraging the development of the kinds of economic activity that are regarded as more valuable including sub-sectors and individual businesses.
• Supporting cluster development.
Yeah, so things have moved. The perceived problems now are more external or structural and as such much more difficult to resolve, in part because we haven’t really acknowledged how big the issue is.
Most of the above get a mention in the taskforce report, but don’t make it to the list of top-line issues.
So if you were on a 2010 ICT taskforce, what would be your top three problems and the related fix?
Gallup – NZ second in world as preferred place to emmigrate to
Sometimes our fragile Kiwi egos get overly hung up on our immigration loss.
What we forget is that NZ is still a sh!t hot place to live and many people around the world would give an arm and leg for the right to reside here.
In Gallup’s latest Potential Net Migration Index (PNMI), NZ ranks second to Singapore as a migration destination. Ego boost – Australia is 6th. Rounding out the top seven are: Saudi Arabia, Canada, Switzerland and Kuwait.
According to the PNMI, if all adults worldwide who wantedto migrate permanently to other countries actually moved where they wanted to today, these top-PNMI countries would see their adult populations double or even triple. The index reflects people’s wishes rather than their intentions.
The PNMI score is the estimated on the number of adults who would like to move permanently out of a country if the opportunity arose, subtracted from the estimated number who would like to move into it, as a proportion of the total adult population.
The higher the resulting positive PNMI value, the larger the potential net adult population gain.
The top rankings are:
• Singapore: +219%
• New Zealand: +184%
• Saudi Arabia: +176%
The last one is a bit weird, but the survey only included Arab nationals and expatriates.
BTW – BigCake supports increased immigration to NZ.
Countries of course have negative PNMIs – countries that could potentially lose as much as half of their adult populations to migration. These include Liberia, El Salvador, Ethiopia, Nigeria, Zimbabwe, Haiti, and Sierra Leone at the bottom of the list.
Hat tip – Richard Florida
NZ Institute describes our economic hole – a guide to why NZ needs to walk the talk to escape
BigCake’s four big themes have been:
1. Economically we are in a hole
2. We need to recognise we are in a hole
3. We can extricate ourselves if we get our act together
4. NZ is still a pretty sh!t hot place, so while climbing out of the hole, we need to protect what’s great about living here.
Regarding numbers 1 and 3, the NZ Institute thinktank has been a major influence.
Following up on yesterday’s post. Below I’ve cherry picked facts from the institute’s latest paper, A goal is not a strategy, to show that NZ is in a hole. Many challenge the way we like to think of ourselves:
Innovation and education
• New Zealand has the highest proportion in the OECD (equal with Ireland) of highly skilled people living in other OECD countries.
• None of the 10 MBA programmes offered around the country focuses on developing the skills needed for international business success.
• In New Zealand innovation is often confused with inventiveness. As a result there is a tendency to think that if R&D output is increased then innovation will increase. Unfortunately for New Zealand, which is quite good at inventiveness, innovation also depends on successful commercialisation of the new way of doing things, and New Zealanders are not so good at this.
• New Zealand’s innovation and business sophistication score is low relative to the scores for many other advanced economies indicating there is great potential to improve innovation, and that doing so would lift economic performance substantially.
Agriculture
• In 1990 New Zealand had around five hectares of agriculture and forestry land per person; today it has less than three hectares per person. Population growth will reduce that further.
• Productivity per hour worked in agriculture is not very different between New Zealand (NZ$40) and Denmark (NZ$50). But in New Zealand the productivity of agriculture is around 83% of the average for the whole economy (NZ$48) whereas Denmark’s agricultural productivity is only around 47% of Denmark’s overall average productivity (NZ$106). Despite outperforming New Zealand in agriculture, agriculture is not the powerhouse of the Danish economy.
• Denmark and New Zealand have almost identical food and agriculture, beverages and tobacco exports per capita. However, New Zealand uses a greater share of its total workforce (6.8%) than Denmark (2.6%) to achieve the same result.
Entrepreneurship
• Two-thirds of New Zealand entrepreneurs are home based and tend to be ‘solo’ operators with few employees. Many of these people are satisfying their desire for independence, to be their own boss. These small independent businesses are likely to have quite low productivity. The relative abundance of these small businesses is therefore likely to be contributing to low overall relative productivity.
• New Zealand has too few highly skilled entrepreneurs targeting international business success. The shortage means the product of New Zealand’s inventiveness – large research output, inventions, and new business opportunities – is not being converted into international business success.
Exporting
• New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.
• New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.
• Commodities are well known for their cycles, and reliance on them would mean New Zealand would continue to be exposed to volatility and price shocks.
General
• New Zealand and Denmark have similar small populations yet the institute calculates that Denmark’s GDP per worker (NZ$170,386) is more than twice New Zealand’s GDP per worker (NZ$83,842).
• New Zealand’s manufacturing labour productivity is the same as that of agriculture, at NZ$40 per hour worked. In comparison, Denmark’s manufacturing labour productivity is almost 90% higher than New Zealand’s, at NZ$75 per hour worked.
• Despite strong doses of economic liberalisation, New Zealand’s GDP per capita remains lower than the OECD average and much lower than Australia’s. New Zealand’s private economy labour productivity is 57% of Australia’s.
• New Zealand scores relatively poorly on measures of infrastructure development, placing 35th in the world with the quality of roads, railways, and electricity ranking worse than the OECD average.
It’s a pretty big hole, but it’s one that we can get out of if enough of us accept we are in a hole. We also need to accept that something more needs to be done to get us out our hole than we are seeing at the moment.
In A goal is not a strategy, which everyone interested in the above issues should read, the Institute again sets out the case for change and the bare bones of an economic growth strategy. It says New Zealand needs to:
• Focus on the internationalisation of high value,differentiated export sectors
• Prioritise labour productivity improvement efforts on these sectors, and
• Reallocate resources from low to high productivity sectors.
[Photo credit - horslips5 via Flickr]
Latest NZ Institute paper out – “A goal is not a strategy”. NZ’s tiddlywinks approach to economic growth
The NZ Institute’s latest discussion paper – “A goal is not a strategy – focusing efforts to improve NZ’s prosperity” – touches on one of BigCake’s observations about how this country attacks its economic growth issues.
We’re playing “bloody tiddlywinks” while countries, even of a similar size, play big boys’ games.
Tens of millions of dollar there, millions here ain’t going to make much difference.
As the NZ Institute says if a goal is important, then resources should be poured in to match. “Competing small countries are committing hundreds of millions of dollars to efforts they regard as strategically important.”
The Herald’s Brian Fallow has commented on the sizeable discrepancy between what NZ will fork out for its national broadband network (calculated to be $5-8 billion) and Australia’s A$43 billion.
“Canberra’s estimate is the equivalent of $2400 per Australian, eight times the per capita outlay of public money our Government is talking about.”
Fallow was making the point that “this does not, as they used to say, compute.” Someone is going to lose – the taxpayer and/or the consumer.
BigCake’s point is the difference in ambition – geographical and population differences aside.
A couple of years ago I wrote about how the then Labour Government was, under the heading of economic transformation, going to spend $3.6 billion over four years on infrastructure skills and R&D.
At the same time Ireland’s National Development Plan projected expenditure of NZ$105 billion on infrastructure alone over six years.
Whether either happened is not really the point – it’s just the gap in ambition (and the money backing it) that hits you between the eyes.
You see the small thinking in the current Government’s tens of millions approach to agriculture R&D.
As usual the NZ Institute’s work is packed with good grunty stuff on what’s wrong with our economy and what we can do to fix it.
“A goal is not a strategy” is focused on boosting the non-commodity side of the economy – “exports of differentiated goods and services, and helping firms overcome the barriers to internationalisation.
“New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.
“New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three sectors have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.
“Other small countries are becoming prosperous by exporting differentiated goods and services and New Zealand must find a way to join them or find another strategy for success.”
A post on the performance of our ICT sector has been banging around my head for a while. The above looks like good context for a post.
Gordon Gekko naive – how to get back trust in business
I think there’s pretty much broad agreement that business has lost society’s trust, though that trust probably hasn’t taken such a big hit in New Zealand as say in the US.
Author and consultant Charles H Green points out in an article in BusinessWeek that this loss of business’ legitimacy is a shame, not just for business but for society at large.
I’ve posted before on one aspect of this – how the Government’s efforts to tilt the playing field in favour of business to boost economic growth is a bad piece of timing, coming as it does when trust in business is at a low ebb.
Green writes there is no such thing as a legitimacy index - “…any attempt at mapping something as ephemeral as legitimacy will be fraught with subjectivity”.
But he suggests legitimacy broadly tracks social phenomena such as trust and confidence, heroes vs. villains, and the popularity of going into business as a career choice. “By these indicia, the socially perceived legitimacy of business was low in the 1960s, high in the ’80s, and is at a nadir now.”
Green points to a couple of drivers of the ups and downs:
• “In the ’80s, there was a common viewpoint about business’ relationship to society. Milton Friedman spoke the economists’ version—companies owed no social debt beyond being profitable.”
• “[Michael] Porter’s major impact was describing business itself as an ongoing Hobbesian state of competition—not just between competitors, but between companies and their customers, suppliers, and social institutions. Corporate success is defined as gaining sustainable competitive advantage over all one’s competitors. Adversarial relationships in Porter’s worldview are simply the Way Things Are.”
• “One of Goldman Sachs’ defenses in its current litigation is caveat emptor.”
“These messages all converged. Business was the source of its own legitimacy. It needed no external endorsement. It would work best when left alone, allowing Darwinian forces to work their magic.”
Funnily enough Porter’s and Friedman’s ideas seen naïve now, post the Global Financial Crisis. (I like the idea of Gordon Gekko being naïve).
How do businesses get their legitimacy back?
Green says they need to recognise that social legitimacy comes from finding a role in society — “not from complaining about society’s intrusions, albeit in the form of government”.
“Business legitimacy won’t be regained as long as it remains all about competing successfully with other stakeholders rather than collaborating with them.
“And business is being rudely reminded that legitimacy derives from society, which occasionally makes its will known via the political system. The smart bet would be to collaborate, not compete.
“… legitimacy must come from within business itself, not from charity, corporate social responsibility — or community development. “
Hat tip – Stephen Lynch
Corrections set to grow 43% on way to becoming largest government department
Without getting into an argument about whether locking up so many people works or not, the cost in talent, time, effort and money on both sides of the bars is saddening.
If you want to get a good feel for the issue, check out John McCrone’s piece on Stuff.
In it, Finance Minister Bill English is quoted as saying the Corrections Department is the fastest growing portfolio and in two or three years will be the country’s largest government department.
That is larger than the two current big boys – the Ministry of Social Development and Inland Revenue.
By BigCake’s calculation to get passed this pair, Corrections will have to grow 43% in that ‘two or three years’.
I’m assuming English was doing his measuring by staff numbers. Social Development’s 2009/10 budget was $18.2 billion (another sad number) compared with Corrections’ $1.35 billion.
Even the extra $431.7 million allocated over the next four years to help Corrections manage a prison population that rises from 8200 prisoners to a projected 12,500 doesn’t make much difference to this gap.
Social Development has about 10,000 staff, IRD 6000 and Corrections about 7000.
Does regulation crowd out investment?
Brian Fallow is on a bit of a downer on the economy in his latest Herald column.
A grumpy reponse to the column’s dismal prognosis on investment from (BigCake assumes) a small manufacturer highlights an issue with regulation BigCake hadn’t considered – does regulation crowd out capital investment?
Reading between the lines of the comment, it looks as though this manufacturer has no time, money or energy for capital investment because it’s all being used up dealing with the demands of regulations.
Fallow says: “The labour market and housing market are torpid, at best. The cost of living is rising and interest rates are rising too.
“Business confidence is slipping and business investment is weak. Credit growth is flat-lining. The net inflow of migrants has dwindled to a meagre and exiguous trickle.
“Even the bright spot – export commodity prices – is getting dimmer.”
He’s also not impressed by our productivity progress which I think he blames mainly on the lack of capital.
But even if businesses could get it, BigCake not convinced they’ll use it to expand. They’re just not in the mood as the comment makes clear.
“Investment in manufacturing now days isn’t about capital. The focus is on putting time and effort into developing procedures and processes that minimise risk and add often unnecessary layers of cost to products which were previously developed and produced quite efficiently.
“Regulation is developed by large corporations in co-operation with Govt regulatory departments and it’s then forced onto smaller businesses who only have limited resources to invest in their business.”
Not sure big business is driving regulations – they hate it as much as the small guys – but usually they are in better shape to cope.
Anyway, our productivity story is still ugly.
Fallow points out that between 2006 and 2009 labour productivity declined at an average annual rate of 0.3 per cent. “But that period is only part of a cycle and included a recession.
“In the complete peak-to-peak cycle before that, 2000 to 2006, annual labour productivity growth was 1.3 per cent, less than half its rate in the 1990s and lower than it was in Muldoon’s day. By 2006 New Zealand ranked 22nd among the 30 OECD countries in labour productivity and in GDP per capita.
“The problem, in short, is capital shallowness – too little capital invested per worker by firms in plant, equipment and software, and by the country in infrastructure.
“When it comes to multi-factor productivity – how much output is extracted from given inputs of capital and labour – New Zealand has in fact significantly outperformed Australia over the past 30 years.”
You depressed yet?