This article was first published in the New Zealand Herald on 29 December 2007

A New Year’s Resolution

Recently I heard a successful businessman nearing the end of his career pondering what he would do if he had his time over again. “I wish I’d given something back” he lamented. “When I look at the poverty and suffering in the world today, I feel I could have made a difference to some other peoples’ lives if I hadn’t focused so much on my business.”

I reflected that his sentiment was admirable but his logic faulty. He had not ‘taken’ anything from the community which he had a duty to give back. To the contrary, he had produced goods and services that customers value, created jobs, made money for investors and paid taxes.

Philanthropy should spring from other motives. The impulses and values that drive it are the same as those that operate within a family or small community: love, a sense of family responsibility, an urge to see our children do well, neighbourliness and altruism. At its best, voluntary collective activity works well, so it’s no wonder people turn to that model in trying to solve the world’s problems. Projects like Make Poverty History seek to draw on peoples’ compassion for others in need and their sense of conscience about their own better fortunes.

Such projects may make inroads into problems of poverty, especially in providing relief in times of crisis. But the underlying concept has limits.

For a start, most people do not feel as deeply about the suffering of faraway people as they do about their own family members. If they did, their powerlessness to provide help would be intolerable. Consider the emotional trauma of treating every death in the world as the death of a loved one.

Secondly, simply giving money to individuals or countries, whether it be by people or governments, does not address the underlying causes of poverty, any more than just dishing out money to our children is going to help them on the path to independence.

Thirdly, governments cannot create wealth; they can only take it through taxation and redistribute it. There is ample evidence that redistribution can do harm as well as good, through disincentive effects, creating welfarist attitudes, and because it often breeds corruption, rarely ending up in the hands of those who most need it.

Finally, redistribution efforts pale into insignificance compared to the most powerful tool for lifting people out of poverty and misery, the market economy. Take Bill Gates, for example. What he has achieved as a software entrepreneur has done more to transform and enrich the lives of millions than he will ever do as a philanthropist.

That is not to diminish the importance of philanthropy and the generosity of Gates and others like him. But, paradoxically, it is by employing their remarkable talents and ideas in running profitable businesses that such entrepreneurs create the wealth that lifts the living standards of others.

Consider the power of wealth creation compared to wealth redistribution in a New Zealand context – Treaty of Waitangi settlements. While important as a matter of justice, their economic significance has been exaggerated. For example, there are approximately 633,000 Maori, and treaty settlements to date total around $743 million. This represents a one-off sum of almost $1200 per Maori which, at an after-tax rate of 4%, represents an annual income of just $48 per recipient. The message is clear: governments, let alone treaty settlements, cannot be a source of material wealth for Maori.

Maori have to generate wealth by participating in the market. A Maori school leaver who starts work at 16 on $12 an hour, plateauing at just $20 per hour at age 25, would by 65 have earned a lump sum equivalent of $646,000. The equivalent tertiary qualified Maori starting at age 25 on an income of $42,000 that continued to increase each year at an average rate could expect to accumulate a lump sum equivalent of around $1.7 million by 65.

The work we do and how well we do it is in the end the key to our productivity. Improving it – through better worker knowledge and training, having better technology or more capital to work with, improving incentives through lowering taxes and eliminating stifling regulation, promoting competition to force businesses to perform better, ensuring as a nation we do what we do best and trade for the rest – is the key determinant of our standard of living and the single most important contributor to reducing poverty and meeting our health, education, environmental and cultural needs.

So in thinking about our New Year’s resolutions this year, for sure, let’s all commit to giving generously to our chosen charities. But let’s also remember the best thing we can do for New Zealand’s less fortunate citizens: promote the changes needed to improve productivity and create ‘the rising tide that lifts all boats’.

Rob McLeod (Ngati Porou) is managing partner of Ernst & Young and chairman of the New Zealand Business Roundtable.