First published in 1997 by New Zealand Business Roundtable,

PO Box 10–147, The Terrace, Wellington, New Zealand

ISBN 1–877148–29–6

© 1997 edition: New Zealand Business Roundtable

© Text: as acknowledged

Production by Daphne Brasell Associates Ltd, Wellington

Printed by Astra DPS, Wellington

President Bill Clinton, it is said, can speak for days without inhaling and is capable of holding sincerely, sometimes for minutes on end, exactly the same views as whatever group he is standing in front of. The columnist Dave Barry has even suggested that if Bill is put in front of a group of trees, given enough time, he will engage in photosynthesis.

Dave Barry's comment reflects the cynicism about contemporary politics that many voters around the world have come to feel. The romance of politics has faded as governments have over-reached their capacity to do good. Faith springs eternal that politicians can make better decisions on behalf of ordinary people than they can themselves, but reality is sinking in with voters. Even President Clinton, a Democrat, has acknowledged that the era of big government is over.

Cynicism about politics in New Zealand seems likely to have gone up a further notch with the Mixed Member Proportional (MMP) election and the wheeling and dealing to form a coalition government which followed it. Those who voted for MMP in the belief that it would put an end to broken political promises have seen promises abandoned by all parties to the coalition negotiations. Those who thought a cloud of pixie dust would descend and transform the behaviour of politicians have seen new levels of rancour and vulgarity in parliament. Pam Corkery has demonstrated an ability to lower its tone single-handedly. After last week's kerfuffle, fisticuffs in the chamber, as in Italy, may not be far away. Welcome to the world of MMP.

None of this should be a matter of any surprise. As the critics of MMP pointed out, it is a system that institutionalises promise-breaking. Moreover, no party now feels an obligation to govern in the interests of the whole community – the name of the MMP game is for a party to pursue its own self-interest. The policies of a party gaining a minor share of the vote can be imposed on the whole community.

What matters is that we draw the right lessons from this experience. One is that if we want less cynicism and disappointment we should rely less on the political process to make decisions on things (like health and education) affecting people's daily lives, and give people more power to make their own choices. Under MMP, voters have less control than ever over politicians. Another lesson is that we should keep MMP under review, and change it if it fails to produce effective government. Thirdly – and this is the theme of my remarks today – we should do everything we can to insist that governing parties deliver on the 'big picture' commitments that they have made to the electorate.

I understand that a new term entered the political vocabulary in the negotiations on the formation of the new government. The term is 'credibility promises', and it refers to those commitments which a party feels bound to adhere to at all costs. For New Zealand First, for example, it seems that 'credibility promises' included scrapping the superannuation surcharge and abandoning the fiscal envelope for treaty settlements.

Whatever one might think of the weight placed by a party on preserving a specific item of policy, that does not constitute the big picture. What is of prime importance is not the particular nuts and bolts of a government's programme but the overall framework. Only a sound, consistent framework, and continuous improvements to it, will allow New Zealand to become a high productivity, high income, and high employment economy. These, rather than specific benefits to the elderly, Maori or other groups, are surely the overriding goals.

Under the coalition agreement the government is committed to maintaining and improving the present economic framework. The document includes commitments to achieve high sustainable growth rates; a strong, open and internationally competitive economy; more employment and less welfare; and a world-class system of education. These are the kind of goals that really matter for the well-being of the community – they genuinely amount to putting New Zealand's overall interests first. They should, I suggest, be regarded as the core 'credibility promises' which we in the business community and the public at large should hold the coalition parties accountable for achieving.

Of course, some politicians may regard such commitments as glib statements of general purpose which are not meant to be taken seriously as a litmus test of a government's performance. But if we want to restore politics in New Zealand to a more healthy state, we should reject such cynical attitudes. Unless politicians in government back their visions with action, they deserve to maintain their rock-bottom standing in public esteem.

In the case of economic growth, for example, both coalition parties have been quite specific as to their commitments. National is committed to the goal of 3.5–5 percent average annual growth to the year 2010. New Zealand First argued for a faster rise in living standards, and committed itself to a goal of 6 percent growth by the end of its first parliamentary term. These are clear, achievable and measurable goals which we in the business community applaud, and we should insist that the government develops policies to achieve them.

What is the probability of achieving sustainable growth rates at even the bottom of this range on present policies? The answer is close to zero. Economic growth has in fact fallen below 3.5 percent over the past year. In its briefing to the incoming government, the Treasury forecast that on current policy settings growth will average only 3.2 percent over the four years to 2000. The minister of finance recently told a conference of tax specialists that the consensus view in a survey of economists was for an average medium-term growth rate of 3 percent. Given the shortfall from his party's commitment, the question he should have been asked was: 'What are you going to do about it?'. And the question the treasurer should be asked is: 'How are you going to achieve average growth of 6 percent – double the current projected level?'.

The government cannot plead that it has committed itself to unrealistic targets. It has inherited a sound economy. The world economic outlook is benign. There is still a large productivity and wealth gap to be bridged between New Zealand and the leading economies. Today policies for improving economic performance are well known and hardly controversial. As argued in the report jointly released this time last year by the New Zealand Business Roundtable and the Auckland and Wellington regional chambers of commerce, New Zealand is certainly capable of moving into the fast lane.

The outcomes of the general election and the coalition negotiations were not bad news from the point of view of improving economic performance. Even though the previous government's campaign was half-hearted and lacked vision, the electorate voted to maintain the economic directions of recent years. The myth that the reforms lack democratic legitimacy has been disposed of. The coalition agreement has preserved the key elements of the economic framework – the Reserve Bank of New Zealand Act 1989, the Fiscal Responsibility Act 1994, the Employment Contracts Act 1991 (ECA) and the open economy.

But the coalition agreement is not good news either. Its worst feature from the perspective of achieving faster growth is the massive projected increase in low quality government spending. Government spending in 1997/98 will be nearly $3 billion dollars higher than was projected in June 1995, less than two years ago, and a further $4 billion is scheduled in the following two years. These are enormous sums. We have not seen such fiscal extravagance since the Kirk/Rowling and Muldoon eras. It has put pressure on monetary policy, discouraged investment and impaired the performance of the export sector which is vital to overall economic growth. It has limited the potential for tax reductions which, as the minister of finance correctly argued at the tax conference, are a positive factor for growth. Ever-increasing government spending was New Zealand's Achilles' heel during the 1970s and 1980s. Despite repeated warnings over the last two years, the government seems determined once again to kill the goose that has been laying the golden eggs.

Thus the government's first decisions as set out in the coalition agreement will do nothing to help achieve its growth objectives – indeed their overall effect will be negative. It follows that in order to keep this most important of its 'credibility promises', further policy instalments are urgently needed. This year's budget is the next opportunity to make significant moves.

There have been some signs that the government realises it has work to do. The treasurer has been stressing the need for tough fiscal decisions, if only to offset new spending commitments. As yet we haven't seen them: last week's Budget Policy Statement revealed that the razor gang rhetoric has so far produced nothing at all by way of spending cuts. Ministers have been assuring the business community that the government has no intention of allowing the economic gains to be eroded. It will have to give the same assurances to international investors – and, more particularly, to back them with action. The Wall Street Journal recently noted that the slowdown in economic restructuring in New Zealand will make investors wary, and others have commented that New Zealand now looks less attractive as an investment destination given that other countries are pressing on with economic reforms.

The Wall Street Journal spoke of New Zealand's "new wild-card treasurer", but I suggest that judgment is premature. Political reputations are not enhanced by demonstrating economic incompetence. Mr Peters would not have sought the treasurer's position lightly: we must assume he is serious about benchmarking New Zealand's economic performance with that of the Asian tigers and lifting living standards on a sustainable basis. From the time of his maiden speech in parliament, many of Mr Peters' economic instincts have been sound and in tune with free-market thinking. Some of New Zealand First's economic ideas were plainly muddled and, to the party's credit, they were dropped in the coalition negotiations. However, its positions on foreign ownership, privatisation and compulsory savings, as well as government spending, remain obstacles to economic growth. The business community also remains critical of the fact that Mr Peters has still not acknowledged that he wrongly tarnished the image of New Zealand business at large with baseless accusations about improper political influence, as has been confirmed by a court of law. These arguments may continue, but we should go forward with an open mind and assume that Mr Peters sees the goal of achieving 6 percent growth as one of his key 'credibility promises'.

Some parts of the coalition agreement should reinforce that commitment. The 'credibility promise' of achieving a fully open economy, for example, is inconsistent with maintaining import tariffs, as well as maintaining the outmoded producer board controls which affect around 44 percent of New Zealand's total goods exports. Similarly, no one would pretend that New Zealand has a world-class education system: while we have generally ranked high in recent surveys of international competitiveness, we have received a low score for education. The commitments in these areas are welcome. So too is the obvious intention to curb the judicial activism of the courts in administering the ECA and making it more difficult for firms to create jobs.

Other parts of the coalition document, however, reflect confused thinking and pandering to special interest lobbies which collectively put at risk the broader vision. For example, the coalition parties are committed to delivering energy "at the lowest cost to the community as a whole". Given this goal it is quite bizarre that the first three "key initiatives" proposed to achieve it are no privatisation of the Electricity Corporation of New Zealand, no privatisation of Contact Energy and no privatisation of Transpower. There is now overwhelming evidence that private ownership serves consumers' interests best. Countries from Poland to Argentina are privatising their electricity industries, and New Zealand will shortly be one of the few countries left with a predominantly state-run system. The business community must challenge the ideological commitment to state ownership in this and other industries. The question to ask is: 'Where is the hard data and analysis that has led the government to take a different view on electricity privatisation from practically every other government around the world?'.

Similarly in education, health and accident compensation, the document shows no recognition that the core problems stem from the dominant role of the state as a provider of services and the lack of competition and consumer choice. Sooner or later people will surely realise the connection between the widespread dissatisfaction with these services and the fact that they are now provided on a different basis from almost every other service in the economy. In education and health we have moved some distance towards decentralisation, but it is an unsatisfactory 'half-way house', with many tensions still pulling the systems back towards the centre. To borrow a phrase from Abraham Lincoln, a system that is half free and half slave cannot endure, and Lincoln did not believe the answer was slavery. In all these areas we need to move towards genuine market systems of provision, with the government concentrating on its regulatory and financing roles where necessary.

On a brighter note, there are some indications that the coalition is concerned about the problems of welfare dependency and may be prepared to get serious about them. Interestingly, the impetus in this area seems to be coming from New Zealand First, which understands the damage state welfare has done to many Maori families, and politicians like Arthur Anae whose outstanding maiden speech was about the desire of Polynesians for work, not welfare. Work-for-the-dole schemes are not the right answer, but the underlying idea that beneficiaries receiving help have a reciprocal obligation to become self-supporting as quickly as possible is certainly sound. This is an area where the community at large – including voluntary organisations, churches and the business sector – must, in my view, assume greater responsibilities because of the real limitations of state welfare. The visit this week by Sister Connie Driscoll is intended to stimulate debate about more effective approaches.

It must be hoped that New Zealand First brings other fresh thinking to the coalition government. One of the main criticisms of the National party during the election was that it had run out of ideas. It does not yet seem to have come to grips with this problem – senior ministers speak openly of 'muddling through'. Muddling through was what characterised the National party under Holyoake, and it cost the country enormously in terms of years of lost opportunities. Politicians who speak or think of 'muddling through' ought to ask themselves why they are in politics and what genuine political leadership consists of.

Politics under MMP is likely to become more fluid, and business should take an interest in the policies of all political parties. It should not play favourites. The new environment allows business more latitude to be both critical and supportive of all parties' policies according to their merits. Recently the Business Roundtable published a report explaining why the Alliance's proposed financial transactions tax was a bad idea. However, we agree with the Alliance that appeals to the Privy Council should not be abolished and it is pleasing that this view has prevailed, despite the prime minister telling us two years ago that opposition to it was a waste of time. Similarly, we believe that many of ACT's policies are sound and innovative and would improve New Zealand's economic and social performance, but compulsory superannuation is not one of them and we haven't hesitated to say so.

For its part, Labour largely wasted the two terms it has so far spent in opposition and has failed to update itself as a political party. It was astonishing to see Labour conferring with the Council of Trade Unions during the coalition negotiations in a way that no other party did with outside interest groups. Labour must surely detach itself from its old trade union links, and with vested interests in the health and education sectors, if it is to present itself as a party capable of governing in the interests of the whole community. In education, for example, social democratic administrations from Sweden to America are promoting alternatives to state schooling: why would anyone expect New Zealand education, a sector controlled by unions, to work any better than our ports or meat industry did under union domination in the past? Labour, of all parties, should be on the side of parents and children, not the unions. The attitude of too many teacher unionists is summed up by the remark of Al Shanker, the most prominent teacher unionist in the United States: "When the kids start paying union dues, that's when we'll start looking out for their interest."

Labour should also accept the reality of the ECA. The ECA has brought enormous benefits to workers, firms and the unemployed, and under MMP it is unlikely that there will ever be a parliamentary majority capable of overturning it. Similarly, Labour must review its commitment to big government, and to high spending and taxing policies. As Chris Patton, the outgoing governor of Hong Kong, said recently:

The directions in which Bill Clinton has been moving in the United States and Tony Blair in the United Kingdom surely point the way if Labour is to become a modern and viable political force. If Labour seriously re-examined how best to achieve some of its traditional goals, I see no reason why it would not find much common ground with the policies of other parties, including ACT. In the past Labour has been the party of new ideas: sadly, it has become backward-looking and is not challenging the country's thinking.

When I spoke to this audience last November I ended by saying that we have come an enormous distance as a country in a few short years, and that MMP must mean much more progress or New Zealand will fall behind again. Those who point to the fact that some people are still struggling must accept that they won't be helped by governments that just sit on their hands. People may have a heart of gold but so does a hard-boiled egg – it is sound thinking and actions, not sentiments, that count.

Leaving aside a few lost souls in the universities and churches, there is now little debate about what constitutes sound economic policies. From recent testimony by Alan Greenspan to remarks by John Howard to the forthcoming visit of Chancellor Kohl, the international respect for our economic reforms continues to be confirmed. Clearly the way forward is for governments to pursue policies that deepen and widen them. The successful countries of Asia are recording growth rates in the range targeted by the coalition partners, not by state intervention but by strengthening their sound economic fundamentals: maintaining low inflation, keeping tax rates low, avoiding large welfare states, maintaining free labour markets and therefore low levels of unemployment, pressing on with privatisation and deregulation, and making greater use of markets and the private sector in delivering health and education. New Zealand has been doing the right things, but there are many more nettles to be grasped if we are to continue moving forward.

The business sector has been speaking with virtually one voice about the steps it wants the new government to take. It has stressed the need to maintain price stability, and the unnecessary widening of the Reserve Bank's target range may at least have the merit of demonstrating that it was an exercise in trivial pursuit and that the real problems lie elsewhere. Chief of these is the growth of government spending. Leaving aside a few dinosaurs, the business sector almost unanimously rejected proposals to spend an extra $100 million on so-called business assistance. Gil Simpson told the recent government-business forum that there should be a Government Help Act which would allow any of us to sue a government which attempts or threatens to help our businesses with edicts or largesse. I doubt whether many business people or organisations anywhere else in the world would take such disinterested stands.

Instead, business representatives have rightly argued that the strong fiscal position should be maintained and applied to reducing debt and tax rates. It should be possible in the next few years to substantially reduce personal and company income tax rates, down towards Asian levels of 20 percent or below. There is no logic in tying tax reductions to the outcome of the referendum on compulsory superannuation. All the evidence indicates that compulsory saving schemes do little or nothing to boost overall national savings, but merely alter its pattern. As Australia's experience with a large balance of payments deficit shows, there is no reason to believe that a compulsory savings scheme displaces foreign investment even if it made sense to do so, which of course it doesn't. From a macroeconomic perspective, a medium-term programme of tax reductions can be managed with or without a compulsory savings scheme, provided government spending is controlled, and should be pursued as a goal in its own right.

If the business sector continues to put forward sound policy ideas in a principled way, and to criticise unsound ones, I believe it will be listened to. We must also accept the responsibility to pursue continuous improvement and innovation in all our enterprises. Only by doing so will we create the growth that raises living standards.

But perhaps the most important contribution business can make in the current environment is to challenge political parties to raise their sights. At the last meeting of the Business Roundtable, the head of the Education Review Office told us of her shock at discovering a school with an item on its notice board: 'Lower your expectations and avoid disappointment'. Contrary to what the teacher unions tell us, this attachment to mediocrity rather than excellence characterises too much of our education system. But it has also come to characterise our political system as well, following the years of leadership associated with Roger Douglas and Ruth Richardson. Business must make it its business to see that a strategy of 'muddling through' is rejected.

We should therefore commit ourselves, I suggest, to insisting that the big picture 'credibility promises' of the coalition parties are kept. New Zealand needs strong, sustainable economic growth if it is to achieve economic prosperity and security. The policies needed to achieve such goals are being advocated by all of the government's main economic advisers. However, they are not being adopted: all international observers are saying that we have gone off the boil, and investors are reducing their exposures to New Zealand. We are just drifting again, as we did in the Holyoake years. The time for a wake-up call is now, not in 10 years' time when we realise another raft of countries has passed us by.

We need a new sense of urgency and commitment to improve the business environment and attack social problems, and we need it now. I suggest that business organisations should keep a six-monthly scorecard on whether the necessary policies are being put in place, and they should highlight shortcomings. Government expenditure trends and the growth outlook should be a particular focus. If this causes some tensions with the government or with vested interests that would be affected by change, so be it. Those who make credibility promises to the electorate should be held accountable for delivering on them.

In my capacity as chairman of Air New Zealand, I suppose I should be grateful that one of New Zealand's growth industries in recent years has been hosting an array of visiting Australian politicians, business leaders, industry association executives, journalists and others, all keen to study New Zealand's economic reforms and their possible application in Australia.

It is therefore with a sense of disappointment that I have to tell you New Zealand is showing signs of losing the plot. For some time now we have been drifting back into the comfort zone that led the then prime minister David Lange to call for the infamous teabreak in 1988, and Jim Bolger to sack Ruth Richardson as finance minister after the 1993 election. As yet, there is no sign that our new Mixed Member Proportional (MMP) electoral system stands for 'Much More Progress', as it needs to do. This isn't just a personal or business view: a recent poll indicated that for the first time in four years more people think the country is on the wrong track than the right track. So I caution any would-be Australian traveller to New Zealand not to expect a lot of inspiration from our recent record or from our current agenda for further change.

Moreover, the business communities in both countries need to recognise that neither Australia nor New Zealand should serve as the economic reform benchmark for the other. Sure, we can identify various areas where New Zealand is ahead of Australia, and vice versa. But both countries are lagging behind the more dynamic regions to our north (and elsewhere), and that's what matters. If there's one thing neither of us can afford it's complacency – a belief that all the main reform tasks have been completed or, worse, that some are simply too hard to be contemplated.

Genuine political leadership, of the type exhibited in New Zealand by Roger Douglas and Ruth Richardson, is, regrettably, comparatively rare. When it exists, it needs to be nurtured and encouraged. When it doesn't, business has a duty to do its bit to fill the void. That's how the New Zealand Business Roundtable sees its role, and I think it can claim to have played a significant part in New Zealand's achievements over the past decade or so. Often this involved rejecting calls from politicians and special interest groups to accept the status quo.

The crucial task of business in public policy debate must be to lift the sights of politicians and the general community – to raise expectations, not lower them. Business must draw on its experience and summon the courage to challenge what is often seen as unthinkable or politically impossible, and explain what can be achieved if our countries adopt sound policies. It must also point out the inevitable consequences, in a fast-moving, global economy, if we don't. As the deputy-secretary of the US Treasury has recently reminded us:

There are already signs that financial markets are revising downwards their assessment of New Zealand's prospects in the light of the coalition government agreement and the policy actions – and inaction – of recent months. For example, economic commentators have reported that the widening of the Reserve Bank's target range for inflation (from 0–2 percent to 0–3 percent) has increased nominal long-term bond yields by the expected half a percentage point relative to the yield on inflation-indexed bonds. The government has not explained why it wanted to raise the cost of borrowing for all New Zealand firms and households. A couple of years ago, long-term interest rates in New Zealand were over one percentage point lower than in Australia. Now we have lost that advantage.

Steve Hanke, professor of applied economics at Johns Hopkins University and president of Toronto Trust-Argentina, recently commented in New Zealand that the target range decision sent out "dangerous signals" to international investors. There have been other indications of a general softening of economic resolve. The government plans to increase spending by $5 billion over the next three years, much of it in low quality and badly targeted ways. The additional spending commitments have led the governor of the Reserve Bank, Don Brash, to warn that this "fiscal expansion", equal to about 5 percent of gross domestic product (GDP), will "dominate the picture for the path of the economy."

Financial markets are reacting to these developments – just as the economic policy meddlers in the early days of the Mitterand government, or more recently in Mexico, found to their great cost. The prospects of New Zealand regaining a triple A credit rating are receding and, unless there is a quick return to economic rectitude, New Zealanders will learn how easily the hard-won gains of recent years can be frittered away, with nothing to show in exchange.

A couple of weeks ago, the Australian Financial Review noted in an editorial that the new government has:

The treasurer and leader of New Zealand First, Winston Peters, strenuously denied this charge. He said:

While this response is encouraging as far as it goes, ultimately it is actions rather than words that count. Last week's positive decision to deregulate postal services may be a sign that the government recognises the need to make up for lost time on microeconomic reform. It needs to be vigorously followed through. Accordingly we await the new treasurer's first budget in a couple of months' time with great interest.

The requirements for New Zealand from here on are clear enough. They were enunciated last year in a report, Moving into the Fast Lane, published by the Business Roundtable in conjunction with the Auckland and Wellington chambers of commerce. The list included:

It is no coincidence that education and health are today the main subjects of public dissatisfaction in New Zealand. They are services which are dominated by government providers, sheltered from competition and – particularly in the case of education – run by unions. Education, in other words, operates in an environment much like our waterfront in the past. Why should anyone be surprised it is not delivering satisfactory results?

Clearly the problem is not simply one of resources. New Zealand spends 6 percent of GDP on education compared with 4.9 percent in Australia, yet Australia scores well above New Zealand in international comparisons of education performance. A recent international study of the achievement levels of 13-year-olds in maths and science ranked New Zealand just above average out of 41 countries, at 24th place for maths and 22nd for science, whereas Australia ranked at 16th and 12th place respectively. One likely explanation is that there is more competition in Australian education, with 30 percent of children enrolled in non-government schools which receive higher per pupil government funding on average than in New Zealand. Others would argue that New Zealand has gone much further in 'dumbing down' its curriculum. I know that David Kemp, Federal minister responsible for schools, and many in the business community are nevertheless very concerned about school performance in Australia, and I understand with good reason. New Zealand has cause to be far more concerned.

It is perhaps worth mentioning to an Australian business audience just how consistent and broadly based New Zealand business opinion has become. After surveying a sizable number of business leaders, the editor of a business magazine recently observed that:

And to underline the extent of support for an open economy, you might be interested in this statement by the Apparel and Textile Federation of New Zealand, following a presentation to a group of cabinet ministers:

Protectionist sentiment is virtually dead in New Zealand. There has been no debate about protection in the Business Roundtable for years, and our Manufacturers Federation is now also a free trade organisation. A final review of tariffs is set down for 1998 and the only issue is whether the remaining relatively low tariffs will be phased out over perhaps five years, or sooner. Recently all the major business organisations said 'thanks, but no thanks' to proposals by the coalition government to spend $100 million on various forms of business assistance. They gave priority to sound economic fundamentals, including expenditure discipline and lower taxes.

The attitudes prevailing today in New Zealand's business community would have been unthinkable 15 years ago when the country still had extensive import licensing and couldn't contemplate life without it. Businesses lobbied for short-term and self-interested policies and reaped the consequences: a third-rate economy. Over the past decade, New Zealand business people have increasingly been prepared to advocate – and adhere to – a broad national interest perspective, based on the belief that only what is good for New Zealand is good for business in the longer run.

An approach to public policy based on similar long-term and economy-wide perspectives does not seem to have taken root to the same extent in Australia. I think that is a great pity. Too many Australian business people and their organisations seem to operate under the mistaken belief that governments can repeal the laws of supply and demand, or that a favour granted to one group somehow doesn't have to be paid for by someone else. For example, I noticed that no less an organisation than the Australian Chamber of Commerce and Industry recently passed a resolution stating that:

With codewords of that kind and the talk about 'reciprocity', it's sad to see some elements in Australian business hoisting the white flag on trade liberalisation.

Business in New Zealand is becoming exceedingly frustrated at the lack of government action over the last three or four years to build on our hard-won economic success. We want to see a much faster rise in living standards, a return to full employment, and more effective strategies to deal with social problems such as welfare dependency. If we in business can help revive the achievement orientation that drove the earlier reforms, I have no doubt that politicians will sooner or later be obliged to take notice.

By contrast, I find it hard to comprehend just how acquiescent some business leaders seem to be in Australia at the Federal government's as yet rather uninspiring rate of progress on economic reform – and at the even faster retreat from sensible policies on the part of the opposition. Perhaps they still cower in fear of the kind of retribution and verbal mauling that prime minister Paul Keating was wont to dish out to his critics. But if the business community will not stand up and be counted, who will?

The extent of the present drift in New Zealand reminds many in business of the Holyoake years – five terms in the 1960s and early 1970s when the economy appeared to perform moderately well, but when we failed to tackle underlying problems and let them build up to crisis levels. The equivalent era of drift and missed opportunities in Australia was, of course, the Fraser years. I know the present Federal government is determined not to be a Fraser government look-alike. Yet as I see it from a New Zealand perspective and from my several business exposures to Australia, there are risks of similar tendencies developing. Let me cite three examples.

First, notwithstanding the difficulty with the numbers in the senate, the Workplace Agreements Act 1996 falls well short of enabling genuine labour market flexibility, with employers and employees free to contract without third party meddling. I hope firms are making what progress they can under the new rules and that someone is already working on the next wave of labour market reform, given the great economic and job creation benefits a freer environment offers.

It is hard to exaggerate the difference which the Employment Contracts Act 1991 has made in New Zealand over the past six years. The confrontational, strike-prone, inflexible industrial relations regime which we once shared with Australia has been replaced by a system in which, to a far greater extent, workers and management work to a common goal. Since the Act came in, output has gone up by 20 percent, around quarter of a million additional jobs have been created, and the unemployment rate has fallen from 10.9 percent in September 1991 to 5.9 percent today, with the long-term unemployment rate falling fastest. The Business Roundtable believes full employment could be achieved in New Zealand by the year 2000, particularly if the government put the interests of the unemployed ahead of the interests of the jobs of our Employment Court judges, who are the main obstacles to realising that goal.

Secondly, the forthcoming decisions on reductions in tariffs on Australia's most highly protected industries will be a watershed. They will signal whether the government cares mainly about consumer interests and overall economic efficiency, or whether it is vulnerable to lobbying by producer interests at the expense of the wider community. People in many other industries will be closely watching the outcome, and to date the messages emanating from ministers on the subject do not seem particularly reassuring.

Thirdly, another litmus test of the government's resolve is the waterfront – an area which New Zealand fixed up in the late 1980s, several years after Australia started talking about the need for reform and holding inquiries to work out what to do. I hope I am wrong, but there have been some suggestions that the government might find waterfront reform too difficult, and that some in the business community are scared stiff of any industrial disruption associated with it. If such views are gaining currency, I hope politicians and the business community will think again. Nothing more symbolises economic mediocrity than a high cost, inefficient waterfront. Nothing is more visible and discouraging to overseas trading partners and potential investors. And nothing would make the remaining elements of the reform task seem easier than success on the waterfront. So I urge business to recommit itself to the task of ensuring that effective and durable waterfront reform occurs soon.

I hope you will permit me briefly to put on my hat as chairman of Brierley Investments Limited (BIL) and Air New Zealand and comment on one or two matters close to our corporate hearts.

BIL made its first equity investment in Australia in 1964. We now have several substantial investments here, including 28 percent of James Hardie, 7.4 percent of Coles Myer and 20 percent of John Fairfax. In addition, Air New Zealand – in which BIL is a 42 percent shareholder – now owns 50 percent of Ansett. BIL also has investments in other New Zealand-based companies which have significant involvements in Australia, such as the Sealord Group, New Zealand's largest deep sea fishing company, the Union Shipping Group, and Tasman Agriculture, which recently embarked upon a major rural acquisition and redevelopment in Tasmania. Today BIL has about $1.8 billion invested in Australia, slightly more than the $1.6 billion it presently has invested in New Zealand.

What happens in Australia is therefore of more than passing interest to BIL. We are keenly aware of a number of regulatory constraints in Australia, such as those affecting takeovers, taxation, media ownership and aviation policy.

The Australian takeovers code has a restrictive regime with a 20 percent threshold. It is now widely accepted that takeover regulation works against shareholders' interests by protecting poorly performing boards and managements, and inhibiting industry reorganisation. New Zealand governments have rightly resisted pressures to apply 'Aussie rules' in this area. The New Zealand Stock Exchange has established a range of options in its listing rules and despite the near hysteria of a few self-appointed shareholder advocates a few years ago, shareholder voting has been uncontentious and overwhelmingly in favour of the less restrictive options. There is a case for reviewing both the listing rules and New Zealand's statutory regime to further liberalise some provisions. It is to be hoped that the current review of the Australian corporations law will revisit this issue, by reviewing the fundamental principles rather than simply tampering with the present regime.

The taxation rules of Australia and New Zealand bias decisions as between outward and inward foreign investment and different forms of domestic investment. While New Zealand is probably further down the track than Australia in examining its international taxation regime, both countries have a long way to go to develop a sound and comprehensive framework which recognises that our economies are now fully integrated into the global economy. As I see it, Australia also badly needs wider tax reforms, including a broader and more robust revenue base.

Australia's foreign investment policy in areas like real estate, banking, civil aviation, shipping, media and telecommunications is also much more restrictive than New Zealand's, and in all cases the interests of consumers are compromised for dubious 'national interest' reasons. On aviation, New Zealand remains keen to move to a genuine single aviation market and 'open skies' policy, which I might add was conceptually the brainchild of the Keating government – not New Zealand. As things have turned out, Australia has been a reluctant partner since Paul Keating intervened to raise the sale price and protect the perceived interests of Qantas a few years ago. The ongoing procrastination about giving effect to the single market has always been geared to Qantas's interests, rather than those of tourism or the travelling public.

There is a similar case for liberalising media industry regulation. Many governments have treated the media industry, both print and electronic, differently from other sectors of economic activity. Underlying this approach was a perception of the capacity of the various media to shape collective views, values and culture.

New Zealand was at the forefront in recognising that this stance no longer has validity (if it ever did) in an era of global communications networks. Our relatively isolated media markets were opened to overseas investment. Other countries have followed suit as they have come to recognise that foreign investment in media does not lead to subversion of national culture. Indeed Rupert Murdoch's foray into the Asia-Pacific market through Star TV is proving the opposite to be true. Appropriate local material is being demanded by consumers, and if it is not provided the service will be ignored.

In APEC Australia and New Zealand are arguing for liberalisation of trade and investment between neighbour countries. Under our Closer Economic Relations (CER) agreement, Australia and New Zealand have effectively tied the knot of open trade and economic interdependence. The time has come to treat trade in services such as aviation, media and communications in a similar way to trade in goods. The time has also come for our investment market to be treated as one.

I spoke at the outset about the comparative rarity of genuine political leadership. Jeff Kennett has taken over the mantle from Roger Douglas and Ruth Richardson in this part of the world. Some of Victoria's initiatives in the sporting arena and the poaching of a Bledisloe Cup rugby test match to the Melbourne Cricket Ground have been quite audacious. For my part, there is a very important lesson from the Victorian election last year – namely that, as was the case with earlier New Zealand elections, political fortune favours the brave. The days are long since gone when the standard answer to the question 'what is the capital of Victoria?' was 'about two dollars'. The Victorian government's drive to improve its economy shows no sign of letting up. Along with other governments in Australia, it is forging ahead with privatisation initiatives at a time when privatisation in New Zealand has virtually come to a standstill. The lessons about political leadership and the payoffs of bold reform risk being overlooked in New Zealand: we badly need a Jeff Kennett right now.

It is in New Zealand's interests for the Australian economy to perform better, and vice versa. Each is a very important market and investment destination for the other. Australia enjoys great natural advantages, and it did not mismanage its affairs as badly as New Zealand in earlier years, but it has nevertheless squandered many opportunities. New Zealand is a smaller and less robust economy and will soon lose its attractiveness to investors if it fails to maintain a margin of excellence over competing economies. Neither of us can afford to flag, but New Zealand in particular has to stand out from the pack.

May I conclude by summarising eight principles for economic reform which have guided the activities of the Business Roundtable over the past decade. They are:

If these principles are followed faithfully, there is no reason why either Australia or New Zealand should be laggards and every reason why they can become top performers. But we should not kid ourselves that these achievements will be possible without the constant involvement by business organisations and individual business leaders in helping to inform the community at large of the nature of the task and keeping governments up to the mark. I hope the Committee for Economic Development of Australia (CEDA) and its membership will commit itself to that endeavour.

What is one to make of such claims? The first thing to be said is that New Zealand is a fully-fledged liberal democracy, as that term is normally understood. Universal adult suffrage embodies equality of political rights. Regular elections give voters the opportunity to judge the government's performance and to confirm it in office or replace it. Since freedom of political association is assured, individuals may seek to stand for an established political party or set up a new party. And since New Zealand has one of the least corrupt systems of government in the world, citizens can be confident that the results of elections are fair.

In this elementary sense, the reforms implemented by successive governments over the last dozen years are legitimate and enjoy democratic sanction. The 1987 election, in which Labour was returned to office with an increased majority although it had initiated painful reforms, provided an unequivocal endorsement of its stewardship. When Labour lost its way, National was elected in 1990 with a mandate to reform the labour market and curb government spending, and was re-elected in 1993 despite its unpopularity in many quarters. And the outcome of the recent election under a new electoral system was a further ratification of the general thrust of the economic policies of the past 12 years. More specifically, the key policies that are necessary for continued economic success were overwhelmingly supported by the electorate, as the Manufacturers Federation correctly observed:

The only significant party pledged to reversing the reforms – the Alliance – lost the most ground among the voters. This result appears to have devastated Trotter and many Alliance supporters. They appear unwilling to acknowledge that excessive government, including state ownership and control of private activities, is on the endangered list in many countries, and for good reason. The successive decisions of the electorate clearly give the reforms democratic legitimacy, even though defects such as a number of broken political promises were apparent in their execution. Kelsey's view of the process belongs in the realm of fantasy.

The case for economic reform is commonly presented without direct reference to democracy, or indeed to politics generally. That doesn't mean that economic reform is undemocratic, but it does mean that the connection between reform and democracy is a subtle one that can be misunderstood. It is vital for the success and continuity of New Zealand's economic reforms that the present policy settings are understood and supported by the electorate.

Democracy is not a form of magic whereby whatever the people want can be quickly brought into being. Yet participants in public debate often speak as if they believe that the only obstacles to the full realisation of the 'will of the people' are sinister human forces, whose influence could be removed if only we could summon up the determination to do so. Hence the readiness to blame perceived demons like 'multinational corporations', 'the New Right', and so on (the different bogeymen move into and out of fashion over time). The Kelsey-type view fails to accept that economic progress always involves change and dislocation, often painful in nature, and sees such dislocation as evidence of a conspiracy. But reality is actually less malleable than those with an unconstrained vision of the world would wish: it is the outcome of a vast range of factors, including the unintended and unforeseen consequences of human actions. It cannot be changed by wishful thinking. The reality of a situation has to be accepted and understood, and the best way of addressing it worked out.

Take the foreign exchange crisis that developed in the lead-up to the 1984 election as an example. The country was close to bankruptcy, in the sense of being unable to service its debts. Imminent bankruptcy cannot be legislated away by a democratic vote. But it can be addressed. The worst way is to repudiate the debt. That could be done, lawfully and 'democratically', but the cost would be huge. Imports of goods and services would fall, the country would face high interest rates for many years and foreign investment would dry up, with catastrophic effects on living standards. Some New Zealand politicians actually entertained repudiating foreign debt. An alternative response is to implement policies that restore confidence and allow the government to sell new debt to fund its commitments. That response, in turn, can be adopted as an explicit policy decision, or it can be imposed by the independent judgments of millions of resident and offshore investors, or as a condition of receiving assistance from the International Monetary Fund (IMF). In New Zealand, it was done as a policy decision: the new government devalued the dollar and implemented other corrective policies. New Zealand's autonomy was preserved, and the change of policy direction was fully legitimate.

The reform process began as a response to an inescapable economic reality. It was better that it was undertaken by New Zealand on its own behalf, and in a way that preserved both the legitimacy of the political system and the country's long-term economic prospects, than imposed from the outside with all the risks to political and economic stability that that would entail. To pretend that there was some other, 'democratic', response is to fall for the childish belief that governments can exercise quasi-magical powers to change reality simply by wishing to do so.

From a democratic perspective, the most objectionable aspect of the foreign exchange crisis was the decision of the Muldoon government to conceal the true financial state of the country from the electorate. If a company's directors were to raise capital on the basis of a prospectus that misrepresented its financial state, they would rightly face serious charges. The incoming Labour government of 1984 cannot be held to have acted undemocratically in changing its election manifesto when it was found to be incompatible with the parlous situation that it discovered. In contrast to Kelsey's mistaken analysis, subsequent measures such as the Public Finance Act 1989, the State Sector Act 1988, the Fiscal Responsibility Act 1994 and greater transparency in government generally have increased information available to electors and strengthened our democratic arrangements.

In a free and open society like New Zealand, democracy is a fundamental attribute. But as well as valuing equal political rights and the power to throw a government out, we also value the rule of law and individual rights. These are usually compatible with democracy, but they may not be. Democratic assemblies have voted to discriminate against minorities and to deprive them of basic civil rights. Many democracies have, therefore, adopted institutional arrangements which, together with legal constitutions, an independent judiciary, a free press and inbuilt moral restraints, offer some protection for minorities and individuals against tyrannical majorities.

More of a problem nowadays, however, is the undermining of the rule of law by the delegation of executive powers to agencies remote from parliamentary decision making (such as the Human Rights Commission), restrictions on the right of competent parties to make mutually beneficial contracts, and the granting of privileges to minorities that come at the expense of the majority. One of the achievements of the Employment Contracts Act 1991 (ECA) was to end what Chris Trotter has called the "economic democracy" of trade union members. Under this "economic democracy", trade union membership was compulsory and unions were allowed to impose on employers conditions whose costs were passed on to the community as a whole. Now individual workers are freer to make their own arrangements, including using trade unions as bargaining agents. In other words, an end to Trotter's version of "economic democracy" has helped protect the community from the harm done by inefficient workplace practices, as well as enhanced individual workers' rights. That surely is a gain.

When people such as Kelsey complain that an otherwise legitimate and constitutional decision is 'undemocratic', they usually mean that they oppose it, and are claiming that 'the people' support their view. Sometimes that claim may be correct, but the popularity of ideas does not make them sound, and vice versa. Galileo was initially on his own in claiming that the earth went around the sun, and Muldoon was undoubtedly right to claim that his disastrous policies enjoyed popular support. Privatisation is an unpopular policy in some countries despite its soundness, just as nationalisation was once a popular idea. The death penalty for murderers often receives majority support in opinion polls around the world, but opponents of the death penalty advance principled arguments against it. Counting heads is no substitute for pursuing scientific truth and sound policies. It would be very strange if that were not the case. To favour whatever the majority favours means having no views of your own and would provide no protection to minorities.

This point brings out the limitations on the scope of collective, political decision making: some things are appropriate to be decided by government, others not. The private sphere of life – markets and voluntary activities – does not require conformity, whereas majoritarian politics does. Kelsey and Trotter would like to give politics a far greater role than I would. A free society and a market economy are superior to the socialist alternative because by minimising the writ of politics they create a more effective form of democracy for enabling all people – ordinary people as well as political people – to make decisions about their own lives.

Economic reform, as that term is used nowadays, often means scaling back industry-specific government interventions in favour of market decision making, on the grounds that such interventions fail, or at least perform worse than voluntary processes. Opponents of economic reform normally want the government to play a more intrusive role. This stance is often defended on the grounds that it is more 'democratic', as it enables the state to reflect more effectively the popular will. Critics like Kelsey do not trust markets, that is, the process by which millions of ordinary people exercise their own preferences in a politically uncoordinated way.

The critics' way of thinking reflects a view that governments can be safely given wide discretion because they are sufficiently disciplined by the possibility of electoral defeat. In practice, the outcomes of unlimited democratic politics are likely to be indeterminate and unstable. This is because the so-called 'will of the people' is itself often indeterminate and unstable. For the daily business of taxing and spending, for example, it may provide little guidance.

Take the debate on budget reform in the United States over the last two years. In 1994, a new Republican-dominated Congress tried to implement what it thought was a clear mandate to move towards a balanced budget. The Gingrich team dutifully proposed to reduce the growth of some 'entitlement' programmes to achieve this end. But no sooner had the cuts been passed than President Clinton vetoed them, invoking the support of a new majority opposing them. What then does the majority of US citizens want? A balanced budget or guaranteed entitlement levels? The truth is that they want both – and many also want a tax cut. More precisely, the majority that wants a balanced budget can be trumped by another majority wanting no spending cuts, which may itself be trumped by yet another majority in favour of a tax cut. The 'will of the people' is systematically ambiguous on this central issue of policy.

The mechanism whereby political decisions are made in the United States has been closely studied, largely because it is so blatant. It is known as 'log-rolling': the system whereby representatives exchange support for the constituencies they represent. In principle there is nothing wrong with this sort of wheeling and dealing. Often it is the only way that minority interests can be taken into account: I'll support your motorway proposal if you support my new dam, or whatever. The trouble is that the outcome can easily be a net loss for everyone. A string of legislative measures may all pass under majority rule, but leave everyone worse off than before. Where that happens, the tax bill is likely to be higher than the voters would collectively choose, if they had the chance to do so.

The general point here is that widely shared interests do exist, around which we could in principle form a consensus. The issue is how to identify and articulate wider interests and to ensure that they have the weight they deserve in the political process. Often a particular action of a government will not in itself command wide support, but that may not be crucial if the general rule under which that action takes place does command support. As one author has put it:

We are talking here about constitutional rules. In New Zealand, we are used to having a simple constitution: a unitary state and a single legislative house with no formal limits on its powers. But the reforms of the last twelve years have given New Zealand what may be loosely termed a new economic constitution. These reforms include legislative changes that are directed not so much towards particular outcomes as towards establishing the rules within which economic policy decisions are taken. The Reserve Bank of New Zealand Act 1989 and the Fiscal Responsibility Act 1994 require the government to comply with open processes with the aim of facilitating policies that reflect long-term and genuinely shared interests, rather than becoming hostage to the short-term interests of influential minorities.

People by and large may see only a dim connection between the upheaval of reform and the greatly improved economic performance and prospects of recent years. But, if they believe that things have improved, they are unlikely to want to reverse the reforms, which therefore will become increasingly legitimate over time.

An important aspect of the connection between democracy and economic reform is the link between democracy and prosperity. The prime case for democracy is that it is the only system of government consistent with individual freedom. But what if there's a trade-off between individual liberty and economic prosperity? Perhaps the biggest potential test that democracy could face is whether it promotes prosperity better than any other form of government.

And yet, as a general proposition, the claim that authoritarian government promotes economic prosperity better than democracy is palpably false. Over the last 200 years, it is the democracies of Western Europe, North America and Australasia that have far outstripped most of the non-democratic world in achieving high material living standards. Typically, authoritarian regimes in Africa, Latin America, Eastern Europe and much of Asia have been economic basket cases. Successful authoritarian regimes have been the exception rather than the rule. Moreover, as such countries advanced economically, they have invariably become more democratic.

Separate studies have shown that the underlying motor of economic growth is economic freedom, including the security of property rights, and that democracy is the form of government that is most likely to protect economic as well as political freedom. As a survey 'Democracy and Growth' published in The Economist of 27 August 1994 showed, a close correlation exists between democracy, economic freedom and prosperity. Although some authoritarian governments do provide considerable economic freedom, and are trusted by international investors not to change their minds, most do not provide a reliable basis for investor confidence. Authoritarian governments lack mechanisms for peaceful succession; the nature of the new regime is unpredictable; and investors face the prospect of measures which would expropriate or devalue their assets.

In this context it is interesting to speculate whether authoritarian China or democratic India will be the more prosperous in the next few decades. Since the late 1970s China has undertaken radical economic reform, and it will continue on that path while the reforming faction of the Communist party retains the ascendancy. India has more recently initiated economic reform and is persisting with it despite a number of electoral reversals. As part of its democratic institutions, India also enjoys a developed legal system that facilitates contracts and protects property rights. Because it began its economic reforms earlier, China has made more progress than India, but at some stage it will have to embark on a transition to democracy, with all the perils and uncertainties that lie along that path. The jury on these two countries will be out for some time.

If it came to a choice between, on the one hand, the individual freedoms that are better protected by democracy and, on the other, material progress – more chickens in the pot, as Bob Jones likes to put it – I would be the first to opt for the former. But as a general rule there is no such trade-off – democratic societies are more likely to be economically successful than their alternatives. Of course, it does not follow that democracy guarantees economic success. New Zealand's own pre-reform economic history shows that democracy makes available a particular path to poverty. Observers from Alexis de Tocqueville in the mid-nineteenth century to F A Hayek in the present century have noted the tendency of electorates in democratic countries to throw sand in the wheels of progress, because of the opportunities for special interests to advance at the expense of the general interest and to stifle an economy with taxes and regulation. But, again as our own history suggests, democracies are also capable of self-correction and self-reform. And the best way to ensure that stagnation does not once again creep up on us unnoticed is to strengthen our new economic constitution.

This brings me to my final topic: whether economic reform really can acquire democratic legitimacy. By broadly endorsing the key reforms in the October 1996 election, voters in New Zealand appear to be conforming to an international trend. Everywhere, some people are grumbling bitterly about moves from state paternalism to greater economic freedom, but most are putting up with it, perhaps because there is a general recognition that the alternative does not work. In Britain, Margaret Thatcher remains an unpopular politician, yet 'New Labour' leader Tony Blair openly expresses his admiration for her and promises not to significantly reverse her labour market reforms or her privatisation programme. In Russia, the reforming Boris Yeltsin was re-elected president earlier this year by a wholly unenthusiastic electorate, even though an opportunity to return to communism was there for the taking. In Australia, the ideas that sanction economic reform are routinely and contemptuously referred to as 'economic rationalism', yet there is less chance of reform being reversed there than here, since all the main parties support it.

The most radically reforming government in Australia is Victoria's Kennett government, which, when it came to power in 1992, deliberately imitated Roger Douglas's strategy of rapid and widespread reform. It was easily re-elected in early 1996 and remains way ahead of the Labour opposition, which is now starting to accept that it will never change what has been put in place. At the federal level, the Howard government is still riding high in the opinion polls and at by-elections, in spite of the toughest budget in years and after moves to reform the workplace and to privatise its telecommunications business.

Taken individually, privatisation and the removal of workplace privileges and protection seem unpopular, yet governments implementing such policies gain popular support. I believe this paradox can be explained. Individual voters know when policies and practices don't work. The railway worker who is paid for turning up daily at the workplace and then playing cards can be expected to defend his/her job, but he/she knows that such practices are unsustainable and would not recommend them to his/her children. So the railway worker acquiesces to the necessary changes when they occur.

In Russia, the transition from communism to a market economy is inevitably proving to be a wrenching experience, but a sufficient number of Russians know that a return to communism would make things even worse, if it could be achieved at all. They know that they have to go through the transition so that their children, at least, have a chance of a better life. So although they will do what they can between elections to avoid the costs of change, at election time their ability to take the long-term view can sometimes come to the fore and induce them to put the general interest before their immediate, particular interests. Indeed, Roger Douglas once made the point that governments actually lose support if they give up on reform. If the National government had spent the last two years pressing on with reform and offering ideas for building on New Zealand's success, I believe it could well be forming its third ministry with a secure parliamentary majority.

Critics of New Zealand's reforms, which are in line with these worldwide trends towards economic liberalisation and civil society rather than state paternalism, have failed to put forward an alternative programme. Repeatedly, Jane Kelsey, Tim Hazledine and others have acknowledged that they have not come up with positive ideas for scrutiny and debate – although of course they tell us they would if they had the time and resources to do so. After 12 years, this argument is wearing a little thin. Policies can only be compared with practical alternatives – not with what might happen in some ideal, imaginary world. Those who only offer criticism and abuse fail to engage in the real issues policy makers are forced to confront, and we are entitled to regard their contributions as empty.

The greatest risk for New Zealand now is a continuation of government inaction. It has been said that, if coalition governments under the Mixed Member Proportional electoral system (MMP) are so constrained by intra-coalition compromises that they are unable to extend the reforms, they will at least be unable to reverse those that have already occurred. This may be partially true – in regard, for example, to changes which would require specific legislation. But many expenditure increases or additional regulatory controls that do not require parliamentary sanction could easily have disastrous economic and social consequences. Moreover, if Roger Douglas is correct in saying that loss of reform momentum leads to loss of political support, governments beset by policy paralysis are likely to create opportunities for populist anti-reform parties or party coalitions to gain the initiative. The politicians now have to find a way of building on the last dozen years of change in the context of MMP. Those of us who are enthusiastic about those changes must therefore continue to defend them strenuously.

It is a great pleasure to be opening a conference which will feature contributions by so many of the people who have helped transform the New Zealand economy and give our country a future. Since 1984 New Zealand has seen a remarkable period of economic change. It has been a transformation which has not gone unnoticed in the rest of the world. But while the reforms have won much international acclaim, some people in New Zealand have short memories. They have forgotten that for 25 years or more prior to 1984, New Zealand’s economic performance was a disaster.

New Zealand once had the third or fourth highest average living standard of any country in the world. By 1984 we were 23rd in the Organisation for Economic Cooperation and Development (OECD), and continuing to lose ground relative to both the developed and the newly industrialised economies. Our productivity growth had for decades been the worst of any OECD country, as had our per capita economic growth. Unprocessed pastoral products still accounted for the bulk of our exports, and our manufacturing sector was grossly inefficient. Since the first oil shock economic growth had slumped, and unemployment had begun trending upwards. At the same time we were failing to live within our means as a country and were seeing a rapid build-up in both foreign and domestic debt.

This outcome was due to economic policies that were arguably the most interventionist outside of the third world and the Iron Curtain countries. We were a highly protectionist economy: high tariffs and import licensing were articles of faith. Domestic competition was severely restricted, if it was allowed at all. Almost every significant sector was extensively regulated. Thanks to the political clout of our dairy industry, you needed a doctor's prescription to buy margarine. When shops were finally allowed to open on Saturday morning – after bitter opposition – this was considered a major liberalising move. Tourists joked that they came to New Zealand and found it shut. To cap it off, we had one of the most inefficient and inflexible industrial relations systems in the developed world – craft-based trade unions and a national award system that applied to all workplaces regardless of their individual circumstances.

Almost every economic policy was shaped by the specific interests of a pressure group. Indeed, our economy was one huge interlocking grid of special interests, walking around with their hands in each other's pockets. Manufacturers were vigilant at clinging on to their protected status. The resulting cost structure meant that exporters were often struggling. However, rather than reform the domestic economy, the government's response was to subsidise exporters. The unions guarded their own privileges jealously and often used their monopoly power to obstruct more productive work arrangements. Management tended to acquiesce in this industrial vandalism; it was much simpler to fly to Wellington and lobby the government for special favours than to make their own workplaces more productive.

Naturally we all learnt to play the lobbying game – even those who realised the rules were absurd. I well remember when Morrison Industries – a company with which I was associated – obtained the right to manufacture bicycles. We put our case before the Tariff and Development Board – the words 'tariff' and 'development' went together in those days – and won. Bicycle imports were reduced to a token level. The officials became quite enthused about this great new manufacturing 'winner' they were picking. It was not hard to pick the loser in this deal – the consumer. The consumer lost out every time.

New Zealand's state sector fitted this environment of special interest politics like a glove. Most government services were monopolies. Almost all were inefficient and overstaffed; they had no incentive not to be. The poor quality of their services constituted a burden on the private sector. For instance, a new business starting up had an average wait of six weeks just to have a telephone installed. But there was no question under our old economic regime of making government trading organisations more efficient. We had to protect the 'jobs' of people 'working' in these departments. They constituted a powerful special interest of their own.

The late Sir Robert Muldoon – whose tenure as prime minister can tactfully be described as idiosyncratic – raised the policies of government intervention almost to an art form. Finding something in the economy still moving in 1982, he slapped a comprehensive freeze on all wages, prices and interest rates. His tenure was abruptly cut short by a snap election which he lost.

Such was the state of the economy inherited by the man who will be speaking next – Sir Roger Douglas. The day after winning the general election in 1984, the Labour government was informed that it faced a foreign exchange crisis. Within days the situation had escalated into a constitutional crisis. Decisive corrective action was required and was boldly taken. The currency was devalued and interest rate controls were removed in order to allow monetary policy to defend the new exchange rate. Price controls were quickly removed.

Two enormous tasks followed. The spiral of fiscal deficits, public debt and credit downgrades had to be reversed, and markets had to be freed up to allow the private sector to generate sustainable economic growth. These twin tasks of stabilisation and liberalisation took most of the next decade. The programme constitutes what a former OECD senior official, David Henderson, has called "one of the most notable episodes of liberalisation that history has to offer".

Before summarising for you some of the principles driving the reforms, I want to take this occasion to comment on how this remarkable episode occurred.

In my view it resulted from an extraordinary constellation of events, ideas, courage, vision, leadership and ability to execute. The critical trigger was the external debt crisis. As Mancur Olson has noted, successful domestic reforms often appear to follow from severe external threats and shocks. New Zealand's experience appears to fit this mould.

There is more to it, however. For example, New Zealand's 1938 foreign exchange crisis moved policy in an inward-looking, defensive direction. This was exemplified by the adoption of import licensing as a 'temporary measure'. Why did New Zealand move in the opposite direction in 1984?

The need for fundamental change had long been obvious to many politicians, including many in Muldoon's cabinet, many business leaders, the government's key policy advisers and many practising economists. Roger Douglas published a book in 1980. Its title adequately captures its spirit. It was There's Got to Be a Better Way.

These politicians provided the leadership, vision and courage for what was to follow. Key figures in the 1984–87 period were the prime minister, David Lange, the minister of finance, Roger Douglas, and those assisting with the finance portfolio, Richard Prebble and David Caygill.

Treasury, which had been unsuccessful in the battle against Muldoon's disastrous 'Think Big' government investment projects and the two-year wage and price freeze, had clear views on what needed to be done. Those views were pulled together as a post-election briefing for the incoming government in the few weeks following the announcement of the snap election in mid-June 1984.

Published some months later under the title of Economic Management, this briefing provided the intellectual basis, the strategy and the blueprint for the subsequent reform programme. Graham Scott in the Treasury oversaw the preparation of this briefing and Roger Kerr was his right hand man.

The story was much the same at the Reserve Bank, except that its views were better known through its research publications and the prominence of Roderick Deane. The three public servants I have just mentioned made outstanding contributions to what was to follow.

Meanwhile, and entirely independently, some leaders in the business community had decided that they had had enough of the old ways. I am proud to be associated with those who set up the New Zealand Business Roundtable, an organisation of chief executives of New Zealand's larger companies. It is unusual among business groups in that it has been dedicated from the outset to the proposition that the interests of the business community are likely to be best served by policies which are in the long-term interests of consumers and the economy overall. This means open and competitive markets and smaller rather than larger government.

The organisation's role is to commission, publish and disseminate the best possible research and analytical contributions to public debate. It is not a lobby group but relies instead on the power of ideas. Roger Kerr was appointed as our executive director in 1986. He has conceived and executed a large work programme including many contributions by international scholars. His influence has been immense. The importance of basing reforms on a strong and consistent intellectual framework, articulated in a way that can be widely understood, cannot be over-emphasised.

However, it would be wrong to give the impression that other organisations were not also moving with the times. Under the leadership of Ian Douglas, manufacturers were moving to support free trade with Australia. That was the start of an enormous shift in thinking for the Manufacturers' Federation. Today this formerly most protectionist of the business organisations stands with the Business Roundtable and Federated Farmers in supporting the elimination of all tariffs.

One of the most notable stories is that of Federated Farmers. This organisation had to cope with the prospect of widespread bankruptcies among farmers early in the reform programme. The problems arose because the elimination of farm subsidies coincided with high real interest rates and a sharp increase in the real exchange rate. The last of these arose from increases in government charges and the large and unfortunate surge in wage rates which followed the ending of the wage and price freeze.

Under Peter Elworthy's leadership, Federated Farmers resisted pressures from its members to call for a reversal of these policies and a return to subsidies, lower interest rates and an artificially lower dollar. Instead it called for an extension of the reform programme.

It is a reflection of those times that the Labour government responded in a manner which would previously have been unthinkable. In December 1985 it issued a statement of policies to support farmers – by lowering tariffs and phasing out import licensing.

It is difficult to communicate today the enthusiasm generated in the mid-1980s between the public and private sectors by the government's evident commitment to policies likely to serve New Zealand's best long-term interests.

Richard Prebble reported in his recent book, I've Been Thinking, that when he was minister of state-owned enterprises he approached 200 top business people to serve on their boards. Their potential legal liabilities would be enormous, and the annual remuneration he could offer represented about one day's pay in terms of their opportunity cost. Yet only three of these 200 turned him down.

Following the 1987 election and the collapse of the Lange-Douglas administration, we must give credit to David Caygill and Ruth Richardson as key supporters of the path-breaking Reserve Bank of New Zealand Act 1989 and continued tariff reductions. After the change of government in 1990, other vital reforms were the Employment Contracts Act 1991, introduced by Bill Birch, and the Fiscal Responsibility Act 1994, which was the work of Ruth Richardson.

The reform programme has been sustained during the terms of four prime ministers and four ministers of finance. It now faces the test of the first Mixed Member Proportional (MMP) parliament. This parliament has no mandate to alter the basic policy framework.

How is it that a reform programme can be so robust?

The two dominant figures in those respective governments, Roger Douglas and Ruth Richardson, will shortly be giving you their own analyses of the situation. I will content myself with stressing some of the broad principles which drove the reforms. It was the consistency with which these principles were implemented – across a wide range of areas – which distinguished the New Zealand liberalisation programme.

First, our reforms were from the start focused on the medium term. Ad hoc responses to short-term problems – which had bedevilled economic policy making in New Zealand – were largely rejected. The attitude adopted was that if a policy was not good for the medium term it was not good – period. The new focus was especially apparent in macroeconomic policy. In the past, monetary policy had often been subordinated to the short-run goals of boosting economic activity and jobs – usually in an election year. The result was predictable: high inflation, big fluctuations in output, but hardly any growth. After 1984, monetary policy settled into its proper medium-term role of ensuring price stability. Fiscal policy had likewise been aimed at propping up economic activity in the very short run, with serious consequences for debt and interest rates. Under the reforms, fiscal policy took on an increasingly medium-term orientation, aimed at controlling, reducing and eliminating the fiscal deficit.

A second principle of the New Zealand reforms was that special interests should no longer be allowed to dominate over the wider interests of the community. Every New Zealander is, ultimately, a consumer, and will benefit in a policy setting where resources are used in the most efficient manner. In the end, enough sector groups realised that everyone would benefit if we had an economy in which no one's special interest held the legitimate interests of others to ransom.

A third principle that drove the reforms was the recognition of the central role of competitive markets in creating wealth. The incentives in markets far surpass those that operate within a centrally planned system. And the ability of markets to harness and coordinate widely dispersed information, through the mechanism of the price system, vastly exceeds the capacity of central planners. Mainstream economics has long known these truths, and they have been repeatedly demonstrated in recent history by the success of market economies. But in New Zealand prior to the reforms, even many business people had an instinctive distrust of market forces and believed that markets needed to be heavily regulated.

A fourth principle behind our reforms was the conviction that New Zealand needed to open itself up to international competition and to international influences generally. The insular assumption that New Zealand industries could not compete, and had to be protected, was progressively abandoned. We discovered we could compete on world markets if the government addressed the inefficiencies elsewhere in the economy which had raised costs and compromised productivity. The last few years have seen a rapid growth of high value-added manufactured exports, and defeatist attitudes are now a thing of the past. New Zealand has become more integrated with the rest of the world in many other ways. Foreign investment has flowed into the country, and immigration is bringing people with important skills and links to overseas markets.

A fifth principle of the reforms was that there is no economic logic in viewing the labour market fundamentally differently from the way we view any other market. There is nothing in this crucial market which stops the laws of supply and demand from operating. On the contrary, labour markets work best for both workers and employers where employment contracts can be freely negotiated and where policy makers resist the temptation to 'help the worker' by imposing statutory monopolies or privileges on unions. That is the lesson from countries with relatively flexible labour markets such as the United States, Switzerland, Japan and the Asian tigers. With the passing of the Employment Contracts Act 1991, New Zealand joined this group.

A sixth principle of the New Zealand reforms was a recognition that, while market failure sometimes occurs, government failure is also a very real feature of the world and cannot be ignored when designing policy. Government failure can occur when the political process is captured by interest groups, or when governments substitute short-term political goals for sound medium-term policies. Implicit in virtually all of the New Zealand reforms was a realistic appreciation of the potential for this type of failure. In our new monetary and fiscal policy framework the recognition of the potential for government failure probably went furthest. Thus we have the Reserve Bank of New Zealand Act 1989 which entrenches in law the explicit goal of price stability. We also have a Fiscal Responsibility Act 1994 that sets down criteria for fiscal disclosure and principles of responsible fiscal management – such as running a balanced budget and achieving a prudent level of debt – which a government must follow over the medium term.

A final principle of the reforms was a recognition that, if a government wants to redistribute income, it should take the direct and obvious route of using the tax and social welfare system for that purpose. Prior to our reforms, many features of our economy involved implicit redistribution between one group and another. Partly through confused notions of what was 'equitable', our whole economy had become a network of cross-subsidies. For instance, many goods and services produced in the state sector were underpriced, with obvious consequences for resource misallocation. The reformers realised that in the end such an economy made everyone poorer.

These, then, were some of the key principles behind our reforms. Their benefits are now undeniable. After a difficult five years following the 1987 sharemarket crash, the New Zealand economy has performed well since real gross domestic product bottomed in June 1991. Growth has averaged around 4 percent per annum. More importantly, New Zealand has demonstrated the capacity to grow in a sustainable fashion. Inflation has been controlled within or near its 0–2 percent target range. In place of running large fiscal deficits, we are now producing sustained fiscal surpluses – a development which has enabled the government to repay all of its net foreign currency debt while simultaneously cutting personal income tax. New Zealand's international credit rating has overtaken Australia's. Unemployment has fallen from its peak of 10.9 percent to 6.3 percent today – one of the lowest rates in the OECD.

It would be wrong, of course, to imply that all worthwhile reforms have been implemented, and that policymakers can now put their feet up and enjoy the gains. Life is not like that. The world does not stand still. While New Zealand pauses to negotiate a coalition government – with the prospects of more spending here and greater compulsion there – many other countries are moving ahead. New Zealand is still a highly taxed country relative to its Asian trading partners, and others are moving more quickly to restrict the scope of government activity so as to allow more scope for private enterprise.

We continue to wallow in mediocrity in our systems for the delivery of health and education. Community dissatisfaction now focuses on these sectors which, almost alone in the economy, are characterised by dominant state providers and a lack of competition.

An even bigger issue for western nations like New Zealand is the future scope of the welfare state. Far too many able-bodied people live on welfare, and the talk is of adding to this by raising, rather than abolishing, the minimum wage. The welfare system subsidises those who have more children than they can afford to bring up and rewards men who abandon their responsibilities. The breakdown of the family unit is one of the most distressing statistics of our times.

Our system of accident compensation is a debt-ridden and divisive national disgrace. And because a few throw themselves on the mercies of others when it comes to retirement savings, it is seriously being contemplated that the savings of all of us must be regulated because big brother knows best. A compulsory savings scheme, if implemented, would be another enormously costly regulatory monster.

In recent years, as in many industrialised countries, there has been an orgy of over-ambitious regulations of a social engineering nature. The Employment Court, the Bill of Rights Act 1994, the Human Rights Act 1993, the Fair Trading Act 1986, the Securities Amendment Act 1996 on insider trading, the Health and Safety in Employment Act 1992, the Privacy Act 1993, the Treaty of Waitangi legislation, the Resource Management Act 1991, the BioSecurity Act 1993, the Commerce Act 1986, various tax rulings and countless other pieces of legislation are frustrating and bewildering commerce in innumerable ways. Meanwhile government expenditure has resumed its menacing upward creep. Add to these problems wage pressures in the non-traded goods sector and the danger signals for New Zealand's external competitiveness are obvious.

While New Zealanders can take real pride in the quality of the past reforms, we cannot eat last year's bread. The baker must return anew to the ovens each day, and so must any country that wants to raise its living standards. We have with us in this conference some who have excelled as reformers in the recent past. We can learn from their wisdom, but the task of moving ahead is a fresh responsibility and a shared one. New Zealand is still operating well below its potential and can do far better yet, given political leadership and informed public opinion. The same goes for most other countries.

I look forward to learning your ideas on how all of our countries can deal with the challenges and opportunities open to us as we approach the twenty-first century.

In just over a month's time, the coalition government is expected to deliver its first budget. This will be an unusually important document. The outlook for the economy will be strongly influenced by whether the government takes decisions which arrest the loss of economic direction, the policy slippage and the downward trends in business confidence that have set in since the October 1996 election.

Recent developments bring to mind the words of the Paul Simon song: "the nearer your destination, the more you're slip-sliding away." The first half of the 1990s saw the remarkable turnaround in the New Zealand economy as a consistent economic policy framework, and a clear sense of economic direction was achieved in the reform programme. Growth, investment, employment and the government's budget position all improved dramatically. More recently we have failed to push ahead and the slide has been accentuated since the election. Not surprisingly, the number of people who think New Zealand is on the right track has fallen every month since the election and now more people think the government is on the wrong track than the right one.

It is important to get these developments into a proper perspective. It was perhaps not surprising that the economy slowed somewhat after the high growth rates of 1993–95. Opponents of the reforms could hardly wait to pronounce that all we had seen was a short-lived growth spurt rather than any sustainable gains. This is a ridiculous view: we are still experiencing the longest expansion of economic growth since at least 1965, inflationary pressures have been kept well in check, and more than 240,000 jobs have been created since 1991. If all these people resided in the same area they would constitute the largest city in New Zealand after Auckland, Christchurch and Manukau.

Nevertheless, recent progress has been unexciting. Believe it or not, we have been in an economic trough now for about two years, with annual growth running at about a 2.5 percent pace. Still, that growth at the bottom of a cycle is better than the average growth in the 10 years to 1980 of around 1.5 percent, and it has been associated with a continuing decline in public debt levels, not a build-up of debt.

The main point to make, however, is that a 2.5 percent growth rate falls far short of the economy's potential and the coalition's growth objectives. The National party has a target of 3.5–5 percent annual growth to the year 2010, and New Zealand First aims to raise the growth rate to 6 percent by 1999. Neither target is remotely plausible on present policies. The key thing to look for in the budget will be the coalition's indications of how it proposes to achieve its stated growth objectives.

What are the reasons for the much more subdued growth outlook and the fall in business confidence? The first and most important is the progressive loss of fiscal discipline in the last parliamentary term and since the election, particularly the massive rise in government spending.

Over-spending by New Zealand governments was a chronic problem throughout the 1970s and 1980s, and a major factor in the poor economic performance of those decades. Central government's share of the economy rose from its level of 25–30 percent in the 1960s to a peak of over 41 percent in 1990/91. This relentless upward trend squeezed private sector growth, put pressure on monetary policy and internationally competing industries, and resulted in higher taxes and borrowing, inflation, rising debt levels and falling credit ratings.

Despite Roger Douglas's efforts, the Labour government never succeeded in reimposing strong fiscal discipline in key areas. That only happened with the 1991 budget, which reduced the pressure on financial markets and the exchange rate and laid the basis for the export- and investment-led recovery which followed. Now we are at risk of losing many of those gains.

Consider the following figures. The previous government's success in turning a large operating deficit in 1990/91 into a substantial surplus four years later reflected two factors. First, it was able, largely through economic growth, to raise $5.2 billion more in revenue in 1994/95 than in 1990/91. Secondly, the government was able to hold the increase in non-finance expenses (that is, spending other than on debt servicing) to $1.1 billion in nominal dollars (that is, before inflation), while financing costs fell by $1.5 billion due to lower debt.

In sharp contrast, in the five years to 1999/00, government spending other than on debt servicing is projected to rise by nearly 16 percent or $4.2 billion in real terms – nearly four times as much as in the previous four-year period. We have already seen some of the consequences of these decisions. High interest and exchange rates have been squeezing the export sector, the 1997 tax cuts which would have brought relief to many low income earners have been deferred, and in the next three years taxes will be $5 billion higher in total – or nearly $25 a week for every household over that period – than they otherwise would have been. In addition, the widening of the Reserve Bank's target range appears to have added half a percentage point to long-term interest rates and therefore to the costs of borrowing of firms and households.

Moreover, much of the new spending is misdirected and of low quality. With the exception of a few of its members who still seem to be attracted to government hand-outs, the business community has rejected the proposed $100 million of business assistance. However, it seems that the government has merely turned around and decided to spend the same amount on a new building for politicians. Much of the proposed spending in the budget will benefit well-off people, not those in genuine need. For example, around 93 percent of the proposed increases in tertiary student allowances will go to people from families earning over $50,000 a year. The removal of the superannuation surcharge and the decision to make doctor visits free for children under five are also regressive in their effect. Overall, this is the most poorly conceived fiscal package we have seen for many years.

There has been almost universal criticism from economic and business commentators of the loss of fiscal discipline and the growing imbalance between monetary and fiscal policy which has contributed to the economic slowdown. The government's attempts to defend it have seemed half-hearted, and the points it has made have been unpersuasive.

First, the government has pointed out that it continues to plan for substantial surpluses and to repay debt. It is true that excessive government borrowing is no longer adding to the risk premium in New Zealand interest rates and absorbing private savings, but unsustainable deficits are only one aspect of bad fiscal management. Increases in government spending have independent effects, particularly by adding to demand pressures and hence cost increases in the non-traded goods sector of the economy. It is these cost increases which are causing the real exchange rate to rise and squeeze the export sector, and it is wrong to blame monetary policy for this outcome.

Secondly, the minister of finance has pointed out that the ratio of government spending to gross domestic product is still projected to decline, despite the extra $5 billion in spending, from 34.7 percent of gross domestic product (GDP) this year to 32.1 percent in 1999/00, partly due to the continuing fall in debt servicing expenses. But what Mr Birch has not acknowledged is that his projections of only two years ago had government spending falling to 30.5 percent of GDP this year. The government's target of reducing expenses to below 30 percent of GDP has been rapidly slip-sliding away. I would not be surprised if the budget reveals a weaker growth outlook than the March 1997 Budget Policy Statement, in which case the target may recede further.

Thirdly, the government has been rather lamely arguing that if Labour and New Zealand First had ended up as coalition partners, the fiscal outlook would have been even worse. This may be a fair point: Labour still describes itself as a spending party whereas Tony Blair's Labour party has pledged to be at least as tough on public spending as its predecessor and to cut income tax rates further. If the political alternative would have been worse, this simply underlines how far all our major parties have abandoned policies of sound fiscal management.

When one looks around the world today, there can be little doubt that the countries that are doing most to create jobs and raise incomes are, generally speaking, those that have kept their public sectors small and their tax rates low. By contrast, high-spending, high-taxing countries, such as those in Europe, are stagnating with high levels of unemployment and increasing social stress.

A recent International Monetary Fund (IMF) working paper looked more closely at the growth of government spending and its effects over the last century. Prior to World War I, government spending in industrialised countries averaged less than 10 percent of GDP; in the United States it was under 2 percent. The ratio rose with the two World Wars and the Great Depression, but was still only just over 25 percent by 1960. However, the biggest rise in government spending came with the subsequent expansion of the welfare state, which took the average ratio to 45 percent by 1990. The growth in the size of government in the New Zealand economy followed a broadly similar pattern.

The IMF researchers examined a range of economic and social indicators and found that recent government growth has not brought about much economic or social progress. Countries with the lowest increase in public spending tended to be more efficient and innovative, and enjoyed lower unemployment. Nor did the wealthy industrialised countries have significantly better performance on measures of education and health than newly industrialised countries where spending averages only 18 percent of GDP. The authors concluded that "most of the important social and economic gains can be achieved with a drastically lower level of public spending than what prevails today" and predicted the next few decades would see important reductions in the share of public spending in advanced economies.

It is also worth noting that there are few signs of growth in the relative size of the public sector in the low tax countries. Hong Kong, for example, has followed a rule of not allowing government expenditure growth to exceed the growth rate of the economy. This seems unlikely to change: in the lead-up to the recent Hong Kong budget, China, the world's last great communist power, was urging Hong Kong to contain its welfare spending. This has increased in recent years, and there are signs of a dependency problem developing. Hong Kong's top marginal tax rate is 15 percent, and there is pressure to cut the 16.5 percent corporate tax rate on the grounds that Hong Kong's economy is becoming uncompetitive.

The IMF research focused mainly on the poor returns from many government spending programmes. A separate factor which impacts on economic performance is the taxes required to finance them. At current levels, the economic or 'deadweight' costs of taxation are high. The costs in question are not just the administrative and compliance costs involved with any tax system; the more important economic costs result from the disincentives to work, save, invest and take risks. Because of these effects, transferring a dollar of income from Peter to Paul costs more than a dollar of national income – the process is like transferring water in a leaky bucket. Studies for New Zealand suggest that an additional dollar of spending could cost the community anywhere between 14 cents and 270 cents of lost income. If a deadweight loss of 20 cents per dollar applied to the coalition's $5 billion spending package, we would lose $1 billion of potential national income or over $800 each year for every household.

A recent study by Professor Gerald Scully for the Department of Inland Revenue concluded that the growth-maximising spending ratio for New Zealand is about 20 percent. It is hard to see how government spending on genuine public goods and a well designed social safety net would amount to 20 percent of GDP in a well functioning, high income economy. Nevertheless, in a report entitled Moving into the Fast Lane (1996), the New Zealand Business Roundtable, in association with the Auckland and Wellington chambers of commerce, advocated as a conservative target a medium-term ratio for total government spending of 20 percent or below by 2005. Combined with other measures, we firmly believe such a reduction of the government spending and taxing burden would lift New Zealand's growth performance to the levels targeted by the coalition parties.

Achieving such a ratio does not necessarily require large cuts in government programmes; the falling ratio of recent years has occurred largely because government spending growth has been held below growth in the economy. But there is clearly enormous scope for reducing government spending that is not cost effective or well targeted. In many instances activities and functions should be eliminated or privatised. A large number of possibilities were put forward in Moving into the Fast Lane. In tandem with lower taxes, there is clearly room for significant privatisation of pensions, education and health care, since a large proportion of the outlays go to people who paid the taxes to provide them in the first place. Such 'churning' of income only adds to deadweight losses while inhibiting choice, flexibility and accountability. The government's focus should be on assisting those who would not otherwise be able to access basic social services. And I can assure you from first-hand experience that there is still a great deal of wasteful bureaucracy and regulatory administration in both central and local government.

There are other factors within the government's control which are contributing to the rather mediocre economic outlook. They include the growth in meddlesome – and often utopian – regulation of the private sector, the reluctance to expose state activities like the Accident Rehabilitation and Compensation Insurance Corporation and the producer boards to greater competition, the standstill on privatisation of government-owned businesses, and the proposal to introduce a compulsory saving scheme. All these are, or would be, a handicap to growth. The decisions against privatisation seem to have been made on ideological grounds – ministers make no attempt to defend them on national interest grounds. The proposal to regulate private savings is being put forward at a time when the government is spending more and reducing its own savings: a 'do what I say, not what I do' approach. The proposed deregulation of postal services is a welcome move and seems to have been accepted with little fuss, but it is a move we have been advocating since an initial inquiry in 1988. As well as moves to restore firm spending discipline, the business community will be looking for indications in the budget that the government will be making up for lost time on microeconomic reform.

In an optimistic review of the world outlook earlier this year, the former deputy editor of The Economist, Norman Macrae, wrote:

These lessons from experience are still not accepted in many quarters in New Zealand, including our main political parties. Spending lobbies like to quote Oliver Wendell Holmes: "Taxes are what we pay for civilised society". When Justice Holmes made that remark the average American's tax burden was about 7.6 percent of personal income. Today people on close to the average wage in New Zealand pay an income tax of 33 percent and a further 12.5 percent in GST on their spending. Many people effectively work two days in every working week for the government. How many people think today that the higher our taxes the more civilised we are likely to be?

Similarly, how many think that spending another billion dollars on our dysfunctional health and education systems will make any more difference than spending a billion dollars on the Post Office or the government electricity department would have made to our telecommunications or electricity services in pre-reform days? Education and health services (with the exception of primary health care, which is mainly provided by private general practitioner businesses and is largely free of complaints) will remain prime sources of public dissatisfaction so long as they are state-provided, sheltered from competition, and dominated by unions. We don't hear similar complaints about private sector services such as those provided by supermarkets, service stations, accounting firms or insurance companies, but the penny doesn't seem to drop. Without basic reforms, no amount of extra spending will make much difference to education and health. And yet spending heavily on government-provided social services is precisely what the government seems likely to do in next month's budget.

It is difficult to see that Macrae's optimistic outlook extends to New Zealand. World growth this year is expected to be of the order of 4.4 percent, but New Zealand will clearly not match that figure. The expected pick-up in activity looks to be weaker and slower in coming. Last week's unemployment figures suggest the fall in unemployment has come to an end for the time being. A disappointing budget would depress business confidence and activity further.

Regrettably, the government seems no longer to be listening to those who have been arguing that its policies are going in the wrong direction. In March the National Bank asked the question: "Can we say that the March 1997 Budget Policy Statement is fiscally prudent?" and replied: "The answer is emphatically No!". The response by the minister of finance was: "I think they grossly overstate their case. That's not helpful to anyone."

Similarly, the Business Roundtable recently warned the government that the prospects of New Zealand regaining a Triple A credit rating were receding. Mr Birch rejected that assessment and accused us of "needlessly and irresponsibly fuelling overseas concern". But what the business community would like to hear from the government is how its decisions to spend an extra $5 billion and relax the Reserve Bank's target band, and its lack of vigorous action in pressing on with necessary microeconomic reforms, are advancing the prospects of a Triple A rating. It is a matter of simple logic that these factors will make financial markets and rating agencies more cautious about New Zealand. The government has not demonstrated its confidence by setting a target date for achieving a Triple A rating. Contrary to Mr Birch's optimism, last week Standard and Poor's scotched the idea that there is likely to be any upgrade in New Zealand's credit rating in the immediate future.

In some ways the present economic and political environment is reminiscent of the period 1988–90. After four years of bold and overdue reforms, the government of the day called for a cup of tea. Business confidence slumped. The Business Roundtable and others repeatedly warned about the damaging effects of the loss of fiscal discipline and economic direction, but to no avail. New Zealand suffered a prolonged recession and a downgrading of the credit rating in 1991, and a further downgrade was only narrowly averted by the budgetary and other measures of that year.

Are we condemned to repeat history? One thing that has changed from the Muldoon years and the associated 'economy of fear' is that critics of government policies are unlikely to be silenced simply by reactions that they are 'unhelpful' or 'irresponsible': more people are prepared to stand up and be counted. Another is that the country has become more economically literate, as the polls indicate many people lack confidence that the government is on the right track. Sooner or later politicians are likely to notice such signals.

As for the budget, the business community must hope for the best and prepare for the worst. If there are no new initiatives to control government spending and promote growth, my assessment is that business will remain quite defensive in its investment plans and that the weak phase of the last two years will be extended. If, on the other hand, the government has been listening to those who are keen to see it build on New Zealand's achievements in the last 12 years and reach its growth objectives, we should expect a new phase of reform which would move the economy forward again. In about a month's time we will know which scenario is more likely.

Fabian Society

All over the world today, governments are engaged in privatisation. In the ten years to 1995, total sales of state-owned enterprises (SOEs) amounted to US$535 billion. That's an unprecedent shift of resources from the public to the private sector.

And the pace is still accelerating. In the March 1997 issue of Financial Market Trends, the Organisation for Economic Cooperation and Development (OECD) estimates that privatisations in its member countries, already at an all-time high last year, could reach a record US$100 billion in 1997. It expects this total to be boosted by a rebound in privatisations in non-OECD countries, notably Brazil.

Latecomers to privatisation have joined in. In 1996 privatisations in OECD countries rose by nearly 30 percent, with most occurring in Europe. Holland has privatised its postal service and Sweden has moved two of its public universities into private non-profit trusts. Last year privatisations in Australia amounted to US$9.6 billion, according to the OECD, and are expected to amount to a further US$7.1 billion this year. In just two years asset sales in Australia will have exceeded in value New Zealand's entire privatisation programme since 1987.

In addition, there is huge private investment around the world in infrastructure projects – roads, water and sewerage, electricity, ports, airports and so forth. One Australian banking firm recently put the total value of prospective federal and state projects in that country involving private sector participation at A$75 billion.

Although privatisation is often considered an ideological issue, it has in fact become non-partisan and non-ideological. It has been embraced by governments of all political persuasions, including socialist governments in Spain and Sweden, populist governments in Argentina and Mexico, former communist governments in Russia and Eastern Europe, and even by the few remaining communist governments such as China, Cuba and Vietnam. Robert Poole of the Reason Foundation, Los Angeles, noted in a paper given in New Zealand last year that at both federal and state level in the United States privatisation has become a non-partisan issue.

The contrast between the current state of affairs in New Zealand and these developments around the world could hardly be more striking. At central government level the coalition has no firm plans to privatise anything. At the local government level there are few significant initiatives in the pipeline. The Auckland Regional Services Trust (ARST), which was set up with the explicit task of divesting most of its assets, is showing every sign of wanting to sit on them and perpetuate its existence.

With the exception of ACT New Zealand, none of our significant political parties is strongly committed to privatisation. I don't recall a single speech by Philip Burdon as minister of state-owned enterprises or Bill Birch as minister of finance in the last government cogently arguing the case for it. This year ministers have been falling over themselves to tell us what they're not going to privatise – from the government's electricity businesses and Television New Zealand to the Accident Rehabilitation and Compensation Insurance Corporation (ACC). In a few years' time New Zealand will probably be the only respectable country with a largely government-run electricity system. We look like becoming the dunce of the class again. Warren Kyd, who has been arguing for ACC to be privatised, and David Hawkins, who has been advocating and implementing privatisation in his role of mayor of Papakura, stand out like isolated beacons of light on the issue.

Why has New Zealand so comprehensively dropped the ball on privatisation while the scores are mounting around the world? Clearly the answer is not that there is nothing left to privatise. As the Treasury noted in its briefing to the incoming government, SOEs are a major component of both the central government's balance sheet and the wider economy. Their total revenue equates to over 5 percent of gross domestic product (GDP). As at June 1996, their assets of $12.5 billion comprised 21 percent of the book value of total government assets and were equivalent to about 28 percent of the asset book value of the New Zealand Stock Exchange's top 40 group of companies. I would be surprised if the ratio of the capitalisation of government-owned companies to privately listed companies came to anything like that figure in most, if not all, other OECD countries, and in most Asian countries as well.

At the local government level, to give just two examples of the scale of publicly owned businesses, the net assets of the ARST amount to around $540 million or over $1,500 for every household in the Auckland region, and the investment by local government in water supply and wastewater assets is of the order of $6 billion, larger than the total investment in Telecom's network. Clearly a significant fraction of the New Zealand economy, which could be run by firms and business people in the same way as other businesses, continues to be run by governments and politicians.

Similarly, the resistance to privatisation in New Zealand cannot be explained by the argument that the evidence in favour of privatisation is not clear-cut. Fifteen years ago it might have been possible to make that argument with some degree of plausibility. Only Britain at that time had embarked upon privatisation as a major policy. The argument largely had to be carried on theoretical grounds. Today there is a mass of practical and empirical evidence to draw on. It is this evidence which has led most countries around the world to go down the privatisation road.

There is no need to spend time rehearsing at length the benefits of privatisation to this audience. They were well summarised in the recent Treasury briefing paper. The standard result from almost all studies is that while gains can be made from running state enterprises at an arm's length from central government, further gains can be made from privatisation. As one major study put it, "ownership does matter for both technical and allocative efficiency". Large scale studies by the World Bank have confirmed that private ownership is a significant determinant of economic performance.

Similar evidence is now available for New Zealand. A study of Telecom concluded that the annual gains to the New Zealand economy from its restructuring are now running at around half a billion dollars. It also found that productivity gains in Telecom since privatisation have been at least as large as those during its period as an SOE and that consumers have received the bulk of the benefits, largely through real price reductions. Without doubt, studies of companies like Air New Zealand and Tranz Rail would also show spectacular gains. In addition to the benefits to consumers, owners have benefited from higher returns, and the government has benefited from much higher tax payments – an additional $100 million annually in Telecom's case. There have been environmental benefits as well.

Clearly, logic and evidence cannot explain the resistance to privatisation that is still apparent in New Zealand. What then are the explanations?

I think the answers fall under two headings: ideological attitudes on the one hand, and misinformation and misunderstanding on the other.

We have to remember why governments became involved in running nationalised industries in the first place. A hundred and fifty years ago, governments by and large saw their job as being to provide public goods, not to run businesses. Major new industries of the time such as railroads, electricity and telecommunications were all developed privately. But under the influence of Marx and later the Fabians, who naturally could point to faults in a world that will never be perfect, governments began to think they could do a better job of running many businesses than the private sector. To varying degrees they took them over – in the Soviet Union they nationalised practically the whole economy.

The socialist vision has remained powerful for much of this century. It was expressed, for example, in Clause Four of the British Labour party's constitution, which was printed on the back of every member's party card:

Tony Blair had to engage in a monumental struggle as recently as two years ago to persuade the British Labour party to drop Clause Four. He was aided by the fact that even the Fabian Society in Britain has been forced to acknowledge the success of privatisation.

But the ideological nostalgia for common ownership lives on in New Zealand, especially among the older generation. More than most other western countries, New Zealand embraced state socialism, and adherents can still be found in the newspapers every day. Thus Alliance candidate Patrick Mooney tells us that "the Business Roundtable will not be satisfied until the few remaining people's assets (sic) are sold off." Productions like the Frontline 'For the Public Good' television programme and the ridiculous film 'Someone Else's Country' are still being made by the ideological Left. An Auckland church leader solemnly told me last year that he thought privatisation was a plague that had suddenly hit the world. Brian Easton has come round to approving commercialisation, but I suspect he will go to his grave denying that privatisation offers greater benefits. There is nothing that can be done about such people. Their resistance to privatisation is ideological. It will not be shaken by logic and evidence. We must concentrate on those whose minds are open to reasoned argument.

What, then, are the sources of misinformation and misunderstanding that trouble open-minded people? Let me deal briefly with a short list of them.

First, some may be influenced by the claim that 'greedy businesses' just want to get their hands on 'cheap assets'. But investors in New Zealand and abroad have access to a worldwide market for existing business assets and new investment projects. There's no reason why they should have a special interest in New Zealand state enterprises. All of them have been sold through open and competitive sales which produced fair value for taxpayers. Like any range of investments, many have turned out well after the event for their new owners while some clearly did not justify the sale price. That's business.

And for those who are hung up on this issue, there is a further response. With market sales, the proper use of proceeds is to return them to the true owners of the businesses, taxpayers or ratepayers, through debt or tax reductions. An alternative, widely used in Russia and some other countries that have divested state businesses, is simply to give shares in the business directly to taxpayers or ratepayers. Those who go on about 'greedy businesses' are remarkably silent about their objections to this approach. I suspect the reason is that, contrary to their rhetoric about democratic decision making, they are not enthusiastic about the idea that people should actually be allowed to make investment decisions for themselves, and want to maintain political control instead.

Secondly, many politicians like to say that they are doing a good job with their SOEs and Local Authority Trading Enterprises (LATEs): they are now running efficiently and making money. Why privatise? We have already seen the answer: privatisation offers further gains. The reasons are elaborated in a recent study by Professors Barry Spicer, David Emanuel and Michael Powell of Auckland University:

They also make the point that, over time, politics typically intrudes on commercial decision making in publicly owned businesses. On average, private businesses perform better, and politicians should not bet against the odds.

Thirdly, some people oppose privatisation on the grounds that some publicly owned businesses are monopolies. For example, Harry Julian of the ARST is on record as opposing the sale of the Auckland port company on the grounds that it is a monopoly. But monopoly is an issue of market structure, not ownership. It should be dealt with by removing all artificial barriers to competition, by applying the disciplines of the Commerce Act 1986, and by supplementing them with disclosure or other limited regulation in exceptional cases. In fact it has been clear since corporatisation that there is plenty of competition in the ports industry, and no new issues arise with privatisation – indeed Ports of Auckland Limited is already partly privatised. The Treasury has noted that among existing SOEs only Transpower and parts of the Airways Corporation pose significant monopoly problems. These problems are not insuperable, and it is noteworthy that the Airways Corporation and Ports of Auckland, as well as New Zealand Post, are among the highly successful companies that have publicly stated that they believe they could do an even better job if privatised.

A fourth argument that is still heard is that prices will go up with privatisation because the businesses will have to pay dividends and tax. At base, this is another of the legacies of socialism and the distaste for the profit motive: the belief that goods and services would be cheaper if firms did not have to make profits. Experience has shown that goods and services are produced most cheaply by firms seeking profits in competitive markets, and privatised businesses are no exception. Even more fundamentally, there needs to be a normal return on capital in any investment, regardless of whether it is in the public or private sector, if society's resources are to be allocated to their best use. The profit element is not removed by nationalisation and the true cost of the product or service cannot thereby be lowered: all that can happen is that someone else pays for it. So this argument too is without any substance.

The fifth and final argument that I will deal with is that privatisation worsens a government's financial position. Today this argument is only heard at the local government level. For example, Alister James, Chairman of Christchurch City Holdings, was recently quoted as saying that selling assets would have a "longer term disadvantage in loss of dividend income", with the implication that rates would have to rise. This argument is self-evidently wrong. While a council loses a dividend stream with an asset sale, it also loses a debt servicing obligation, and because the sale price will incorporate the higher expected earnings stream of the asset under private ownership, the council's financial position will improve. It is hard to credit that this argument still has strength given the contribution which privatisation has made to lowering central government's debt and taxes and strengthening its financial position.

These are some of the persisting core issues about privatisation that are surrounded by misinformation and confusion. There are other objections, such as privatisation creates unemployment, that control of 'strategic' assets will be lost to foreigners, that social objectives will be sacrificed, that 'necessities of life' should not be privatised and so forth, which I have discussed elsewhere. And I have not mentioned a number of other benefits of privatisation which have become more apparent over the years, such as the benefits to firms of being set free to pursue long-term and international business strategies; the creation of global opportunities for firms and professional advisers to capitalise on New Zealand's privatisation experience; the deepening of the New Zealand capital market with benefits for superannuation funds and other investors; and the freeing of the time of central and local government politicians to concentrate on their core roles. A fuller discussion of privatisation should also include the many forms it can take other than divestment of government assets, such as competitive tendering for services, contracting out, and a range of options for private involvement in infrastructure provision.

My conclusion is that if New Zealand is to resume an active programme of privatisation – as urged by the OECD, most New Zealand business organisations and, I suspect, most of the government's departmental advisers – there will have to be a great deal more public discussion both of the benefits of privatisation and public misconceptions about it. The silence on the issue is deafening. Where are the academics and business leaders pointing out the benefits of privatisation? Why does the National party project itself as a private enterprise party when its long-term record – from the time Radio Hauraki had to go to sea to force the issue of private radio to the present day – is one of words not matching deeds? If, as the government argues, selling eight small power stations is a good idea, why wouldn't selling eight big ones be an even better one? As the party purporting to represent the lower income sector, why is Labour not pointing out the benefits of privatisation to consumers and promising more, as Labour leader Tony Blair is doing in Britain? He has been contemptuous of:

And when did we last hear from the Consumers Institute on privatisation? It is little wonder that privatisation is often perceived as unpopular in New Zealand when the field is left to those who spread myth and misinformation.

It is not just politicians who come out with knee-jerk reactions against privatisation; some media commentators, for example, are equally guilty. Two years ago the New Zealand Business Roundtable published a report on the Fire Service which canvassed a range of options for improvements to one of the worst-run government organisations, including a brief discussion of options for private provision. It was greeted with a vitriolic editorial by the Evening Post, which advised its readers that:

Apart from the extraordinary suggestion that a country where the government spends one third of national income is a no-state laboratory, the editorial showed an appalling ignorance of fire service issues. Our report had much in common with the independent McCaw report of 1993, commissioned by the Fire Service itself, whose recommendations have never been taken up. In respect of private options, anyone who knows anything about fire services would be aware that half of Denmark's fire services are provided by a private company, Falck, which also operates internationally, and that the ratio of the costs of fire services to GDP in Denmark is about half of New Zealand's ratio of costs to GDP. There are many other examples of private fire service provision. To be fair, in more recent editorials the Evening Post has been critical of the Fire Service's performance. However, it has yet to recognise that the so-called "painful reforms" have come to nothing; that the Fire Service's budget is again blowing out; and that nothing will change until the kind of reforms canvassed in our report and the McCaw report are implemented. And newspapers are not very good at saying 'sorry' for getting things wrong.

What is particularly galling about the fire service example is that this year the government of the state of Victoria, Australia, has been looking at privatising or contracting out part of Melbourne's Metropolitan Fire Brigade. It has been doing so on the basis of a report by the accounting firm KPMG, presumably yet another 'New Right' organisation committed to a 'minimalist state'. Victoria has been pursuing a vigorous privatisation programme with strong public support, and there is no sign that it is stopping. The huge City Link private roading project in Melbourne is now well underway, two ports have been sold, most of the electricity generation sector has been privatised, and the Kennett government has just announced plans to privatise the state's high voltage electricity grid, PowerNet Victoria, by the end of this year.

Elsewhere in Australia there are similar moves. Qantas has been privatised. The banking sector is now mostly in private hands with the sale of the Commonwealth Bank and most state banks in recent years. The Federal government has commenced the sale of Telstra and plans to sell its rail and shipping interests and the major airports. Australian governments are ahead of New Zealand with reforms in roading and water, including forms of privatisation. And, as in many other countries, reforms are now moving into the area of social services. The Commonwealth Employment Service is being contracted out. The Australian Financial Review reported in February that "the idea of privately run prisons is gaining strength in Australia", and the Court government in Western Australia is committed to continuing with the privatisation agenda that marked its first term, with particular reference to hospitals.

What makes these Australian examples even more mortifying is that Australia is far from being a leader in privatisation or microeconomic reform generally. Today the pace is being set by Chile, many countries in Asia, a number of state governments in the United States – Michigan, for example, has recently privatised its workers compensation scheme – and some countries in Eastern Europe. Many commentators in Australia are frustrated that its governments are not doing enough. But Australia provides a measure of how far New Zealand has fallen behind the pace. As an Australian said at a recent conference I attended: "I'd heard about all these reforms going on in New Zealand but I've lived here for three years now and nothing has happened."

The parties to the coalition government have an ambitious vision for New Zealand. The National party has set itself the target of achieving 3.5–5 percent annual growth to the year 2010, and New Zealand First aims to achieve 6 percent growth by 1999. Such targets are feasible, but only if reforms are pushed ahead: there is not the remotest chance that sustainable growth of anything like 5–6 percent a year will be achieved on present policies. All the government's economic advisers will be telling it that any strategy for achieving such goals must include a vigorous programme of privatisation.

Sustained economic growth is the only feasible means for any country to improve overall living standards. On present trends, Australia is likely to achieve higher growth than New Zealand in the foreseeable future. If New Zealanders want to vote against privatisation and other policies which will make them stay relatively poor, I have no problem with that as a matter of democratic choice. But they should realise what they are doing, and they should not complain when Australian living standards far outstrip ours and when most of our young and enterprising people are 'over there'.

Notes:

(1) Base 1994/95 prices.

(2) Derived from the GDP deflator implicit in the 2 December 1996 Economic and Fiscal Update, the 1997 BPS and the 23 May 1996 Budget Economic and Fiscal Update.

Local government doesn't exist in a vacuum: rather it is one means of achieving desired economic and social goals. We therefore need to consider the role of local government in the context of all available options for meeting those goals. We need to assess which tasks it can best undertake and which are best handled in other ways.

Few people now need be convinced that New Zealand's economy is in much better shape as a result of the economic changes of recent years. Many of those changes have involved a rethinking of the role of government in the economy. But there is still much work to be done if we want to attain the living standards of leading countries and deal with outstanding social problems. That will require us to carry on rethinking current ways of doing things in both the public and private sectors, and striving for continuous improvements.

The last National government set itself the goal of an annual economic growth rate of 3.5–5 percent to the year 2010. New Zealand First has a higher target: it is committed to achieving annual growth of 6 percent by the end of its first parliamentary term. Few, if any, economic observers expect any of these goals to be achieved in the next three years on current policies, despite the stronger economy and a favourable world environment. Most expect the coalition's initial package will harm such prospects, particularly through the size and low quality of its government spending proposals. These will exacerbate tensions in the economy and hurt internationally competing industries. It follows that further bold initiatives will be needed if the coalition parties' commitments to high growth rates are to be credible.

Such initiatives must involve local government, whether they originate in central government or the sector itself. Local government is a big player in the economy, in terms of assets, spending, employment and its regulatory role. If it is underperforming in any way – for example by not clearly identifying its proper functions, by becoming involved in extraneous activities, or by not operating at maximum efficiency – then the whole economy suffers. That means citizens in general suffer because, contrary to popular rhetoric, the only purpose of the economy is to meet people's needs.

Of course citizens have other desires as well as an efficient economy, and public policy – including at the local government level – should also be concerned with things like public amenities and the environment. And there are some, such as Tony Simpson, president of the Public Service Association (PSA), who have argued against the idea of an efficient economy and the higher living standards that go with it, saying:

This statement is presumably intended as a defence of maintaining inflated payrolls in the public sector, but it is economic nonsense. Resources, including labour, are always scarce relative to people's wants in an efficient economy, as the experience of the high employment economies of East Asia demonstrates. The PSA is perfectly entitled to argue for the acceptance of lower living standards, but New Zealanders seeking increases in wages and other incomes don't seem to share its views.

Fortunately, there is a growing recognition of what local government needs to concentrate on if it is to play an effective part in economic and social development. Let me quote you a relevant passage:

Contrary to what you might be thinking, that is not an extract from a New Zealand Business Roundtable speech. It comes from an article by the mayor of Papakura, David Hawkins, which appeared in the Herald last year. Mr Hawkins has written to us saying he agrees with our general approach on local government but believes it doesn't go far enough. He has questioned whether New Zealand will ultimately need local government at all.

That approach is broadly in line with our thinking and, I believe, that of most other business organisations. To say that local government should focus on such core functions is not to say that the other activities listed by Rodney District Council are unimportant. It is simply to say that local government is not the best institution to undertake them, and that by over-reaching itself it will be less effective in discharging its core responsibilities. Indeed the best contribution local government can make on issues such as unemployment and economic development is to achieve lower rates, reduce regulatory burdens, and organise efficient infrastructural services so as to encourage private investment and job creation.

A common objection to this line of argument by some in local government who defend a 'big government' role is to say they have popular support. This misses the point. We all want local governments to be democratic, but we also want their policies to be sound. Sir Robert Muldoon's policies enjoyed democratic legitimacy, but they ran the country into the ground. Economic directions changed democratically in New Zealand because the arguments about the failings of Muldoonism ultimately prevailed. Debate about public policies must be based on sound public policy criteria: the fact that a particular course of action enjoys temporary popular backing does not necessarily make it sound.

The argument is similar to those which would have businesses assuming all kinds of social responsibilities or schools taking on non-educational roles. If acceded to, the likelihood is that the core functions of all these institutions will not be performed well, activities of marginal social value will be picked up, substitutes for them will be crowded out, and those who should be assuming the relevant responsibilities are let off the hook.

The proper business of local government is not hard to define conceptually. Local government is part of the public sector. By definition it should be involved in organising the provision of public goods. It should not be involved in the provision of private goods. Most goods are private goods: they are bought and sold in the market place, or – in the case of many sporting, recreational and charitable activities – organised voluntarily. A public good satisfies two main criteria. First, is it possible to charge for it? If not, it may be a public good. Second, can people be excluded from using it? If it is not possible to exclude non-payers, it is less likely that the service will be provided commercially. Open-access parks, footpaths and stormwater drainage are standard examples of public goods at the local government level.

Public goods whose provision must be organised by local government are quite rare. Many councils are now rightly reviewing the services they provide to determine where user charges or part charges are justified. The public good component of services, however, will usually need to be financed from rates.

The vast majority of the assets tied up in local government – roads, water and sewerage, power supply, ports, airports, forests, bus companies, parking buildings and so forth – are used to produce private goods. Roads, for example, are largely funded by user charges and (pedestrians aside) non-payers are excluded. Together with local government regulation, these are the activities that have the largest impact on the business sector and hence on economic growth. For this reason the interest of the business sector in local government is mainly focused on these activities. By contrast, I think business organisations are relatively relaxed about whether councils provide things like community or information services on a modest scale. Especially in small communities, this may well be a sensible role.

Because the 'big ticket' items account for the lion's share of councils' assets and spending, they should obviously account for most of their decision-making time. And because they are largely private goods, questions are clearly raised as to whether councils should remain involved with them. My view is that in most cases there is no longer a need for local government involvement, at least in its present form. Power companies, ports and airports are increasingly being run by the private sector around the world, and there is now substantial private sector involvement in roading and water supply.

The evidence in favour of private ownership and/or management of business enterprises is now abundant and does not need to be rehearsed here. There is a convenient summary in the Treasury's briefing to the incoming government. Given the generally superior performance of businesses under private ownership, there needs to be very strong public policy reasons for keeping them in the public sector. It is not sufficient just to run state-owned enterprises (SOEs) or Local Authority Trading Enterprises (LATEs) on business-like lines; typically there are further large productivity gains with privatisation. Nor is it sufficient to point to the fact that some private businesses fail, and that some SOEs and LATEs have achieved good returns. The relevant point for public policy is that on average and over time the performance of private firms is superior, and politicians should not bet against the odds. It is simply ludricrous for Manukau City, for example, to put ratepayers' money at risk by undertaking a grass-mowing operation in Brisbane.

There is little doubt that New Zealand's economic growth will be stunted in the absence of further privatisation at both the central and local government levels. Some councils are moving in that direction; others which are almost wholly commercial operations, like the Auckland Regional Services Trust, seem reluctant to give up their role.

Some extraordinary arguments are still made about privatisation. A classic was a recent Otago Daily Times editorial which concluded that if the Dunedin City Council sold its electricity and forestry assets, rates would be 20 or 30 percent higher. Can you imagine anyone seriously suggesting that if central government sold its electricity or forestry assets, taxes would go up? The future value of the income streams of government assets is capitalised at the time of sale; their present value is typically higher under private ownership because of the expectation that the businesses will be managed more efficiently; the financial position of central or local government is improved as a result; and there is the potential for taxes or rates to go down, not up.

Another objection to privatisation that is sometimes raised is that business simply wants to get its hands on assets and reap the benefits. This overlooks the fact that buyers have to pay full value for assets sold by councils in competitive sales, and that the main beneficiaries of privatisation are consumers and ratepayers. Moreover, while competitive sales are usually the best means of privatisation, we have argued that a good alternative for a council is simply to issue shares in its businesses to their true owners, the ratepayers. Letting them decide whether to remain investors is surely the most democratic of democratic procedures. So forget about so-called 'greedy' businesses: what is the objection to this approach?

Where councils need to ensure that services of a largely public good nature are provided, it is equally well established that there are usually major gains from contracting them out by competitive tender to the private sector. A recent case in point concerns bus services in Auckland. Around 50 percent are now operated on a commercial basis, and the subsidy required in those sectors which went to tender has dropped from $22 million a year to $13 million. Wellington City Council is moving to competitive tendering for a wide range of services. Central Hawkes Bay, which has a population of 12,500, makes the greatest use of contracting out in the country and has reduced its staff to 25. If other councils were to achieve the same ratio of staff to population, employment in local government would fall from 38,000 to 7,000, although many of these people would find jobs with private contractors. It is not difficult to understand why Tony Simpson and the PSA defend inefficiency and oppose local government reform. One can also see why excessive local government costs put pressure on the real exchange rate and the traded goods sector.

Yet resistance to such productivity gains is entrenched in some elements of local government. Stuart Macaskill, chairman of the Wellington Regional Council and former president of the then Local Government Association, is one who has repeatedly come up with spurious arguments against privatisation and contracting out. He has even argued that the regional council, which has no comparative expertise in managing forests, can get a better return on its forestry investment by hanging on to it rather than selling it. The logic of the argument would suggest that the Wellington Regional Council should own the entire national forestry estate. Recently Mr Macaskill has opposed the decision by the Wellington City Council to tender out maintenance of its water supply and argued that his council should be given a regional monopoly. Fortunately, the replies by the mayor and other Wellington City councillors were robust: the regional council had been slow to fix leaking pipes, it had done "a lousy job", and "he is trying to protect his patch".

Papakura District Council is moving to franchise its entire water supply and sewage disposal services to a private operator. Stuart Macaskill's last line of argument against such proposals is that 'the public would not wear it'. Yet only eight public submissions were received on Papakura's proposal, and five of them urged the Council to take the next step of full privatisation. This is in line with experience elsewhere with water industry reforms wherever political leadership has been shown. Commenting on Australian experience with user charges for water, the Australian Financial Review noted in an editorial last year that "the politics of paying for water ... has never been a significant issue." The average weekly cost of water to a New Zealand household amounts to less than it spends on Lotto and other forms of gaming, and there would be large efficiency improvements with a more commercial approach to water supply.

An interesting question is whether local government should be required by central government to divest its commercial operations and contract out services. The Auckland Regional Services Trust is required by legislation to sell most of its assets, and compulsory competitive tendering has been applied widely in Australia and to roading in New Zealand. The Economist noted recently that compulsory tendering in Britain has made it easier for council leaders to push through difficult but desirable decisions in the face of opposition from staff and unions. To date, the Business Roundtable has seen such issues as a matter for local decision, but the coalition agreement proposes restrictions on sales of certain council assets, and Stuart Macaskill has proposed even stricter restrictions – a 60 percent level of support in a poll of voters – on the sale of water companies. If, contrary to the trend of policy in recent years, Mr Macaskill is leading a move in local government towards seeking greater control by central government, perhaps this is an issue that ought to be debated openly at the national level.

Let me sum up. Local government has been a lagging sector in New Zealand's economic reform programme. It is pleasing that some councils are now quite vigorously changing the way they do things and may even be showing the way to central government.

Nevertheless, there is still a serious lack of focus and massive under-performance in the sector. Just in the last two months there have been media reports of the Auckland Regional Services Trust losing $7.5 million on a recycling station, the Hutt City Council valuing a carparking building that cost $22 million at $6.3 million, and the Wellington City Council selling a works depot at a loss of $11 million dollars, to pick just three random examples. Wellington deserves credit for exiting its works business, but it should never have been in it in the first place. Last year increases in charges for central and local government services consistently outstripped inflation in the private sector and made the Reserve Bank's job more difficult. Whereas central government reduced taxes and should be able to make further reductions in the near future, only a handful of local authorities have started to reduce their rates.

If New Zealand is to achieve sustainable non-inflationary growth at the levels targeted by the coalition partners, a much greater effort by local government will be required. At around $27 billion in 1993/94 values, ratepayers' equity invested in local government is around half the market capitalisation of all the companies listed on the New Zealand Stock Exchange. Higher returns on these massive investments, whether they are retained in public ownership or shifted to the private sector, must clearly be part of any significant improvement in living standards.

The new financial management legislation is a welcome stimulus to better decision making in local government. In particular, it will throw a much clearer spotlight on the genuine public goods functions of councils, promote more efficient pricing and provide a better long-term perspective on trends in councils' spending, revenue, debt and net worth. It is disappointing that fewer than 15 percent of councils are ready to adopt the new framework this year. The business sector will be placing a good deal of weight on it in its submissions on forthcoming plans.

Finally, the government has signalled some initiatives in the coalition agreement which will affect local government. The document emphasises efficiency in local government and makes specific mention of the numbers of elected politicians, charging policies and levels, the separation of regulatory and service provision functions, competitive tendering and contracting out, and the Resource Management Act 1991. All these are relevant from a business sector perspective. Given the pressures facing farming and other export industries at present, the business sector will be looking for strong leadership from central government and within the local government sector this year to create an environment more conducive to business expansion and economic growth.

The growing private sector involvement in roads has many features which are common to developments in other network industries. One driving force which many governments face is the need for major additional capital expenditures.

In Europe, North America and Asia, economic growth and industrialisation have seen growing traffic volumes outstrip the capacity of the network. Anyone who has been to Bangkok in recent years will have observed this problem at first hand. Although typically less severe, congestion is also an issue in many of the world's major cities. A recent European Commission green paper reported that congestion is estimated to cost the European Union countries around 2 percent of gross domestic product (GDP) every year. In the United States it is reported that traffic volumes have grown 30 percent in the last decade, Americans lose 2 billion hours a year to gridlock, and congestion costs businesses US$40 billion a year. The Federal Highway Administrator predicts that 34 percent more capacity needs to be built during the next decade just to stay even with the growth in vehicle miles. For 50 cities, that would cost US$150 billion.

Further, many governments in the industrialised and former communist countries lack the will or the ability to raise the large amounts of finance necessary to upgrade their networks. Rather, they are struggling to reduce the size of the state sector, tax burdens and public debt, while facing great social pressures in the form of unemployment, welfare dependency and the needs of ageing populations. The collapse of communism and the success of a number of Asian countries in which government spending is less than 20 percent of GDP have served to undermine confidence in big government.

Finally, technological change is improving the efficiency of private billing systems. Previously toll booths required manual means of payment. These slowed traffic flows. New technologies are in the process of eliminating this problem.

As in the other network industries, private sector involvement in roading is likely to reduce unit costs substantially and improve the quality and mix of services. The scope for such gains depends on the extent of privatisation and on the quality of the constraints which are imposed on providers of road infrastructure.

Growing private sector involvement is associated with increasing recourse to the use of tolls. In 1993 the Reason Foundation published a list of countries in which private tollway road projects were under study, under construction, being franchised, or operational. The list encompassed 33 countries and scores of projects. The greatest levels of activity were in Australia, Asia and Western Europe.

Australian developments included the Sydney Harbour Tunnel, Sydney's F4 and F5 tollways and (more recently) the Melbourne airport tollway. Activity in Asia included the major Hong Kong-Guangzhou superhighway, the Guangzhou ring road, Malaysia's North-South Toll Road, Thailand's second stage expressway and the Bangkok elevated transport system. Other private tollways were under construction in Italy, France and Mexico.

In the United States, greater private sector involvement has followed permissive changes in legislation at the federal and state levels. In 1991 Congress decided to allow new tolls on federal roads and joint private and public funding of new investment. Some states have been more permissive, passing experimental laws designed to allow 100 percent private funding. I would note that joint private/public sector funding creates risks for the government concerned in respect of the privately owned party's performance. It may also create the perception that the government is implicitly underwriting its partner in the joint venture. Unless these risks are clearly negligible, 100 percent private sector funding seems more desirable from a public policy perspective.

Reflecting the easing of the earlier constraint on private sector involvement, a US$326 million, 22.5 km private road has since been built in Virginia, linking Dulles airport to Leesburg. This is the first private toll road to be built in the United States in more than a century. It is reported to be unprofitable and in the process of rescheduling its debts. The second, a 16 km strip of four commuter lanes (known as SR-91), is in suburban Los Angeles. It is the world's first non-stop toll road and is reported to be profitable. Other private roads are planned in Arizona and Oregon.

The United Kingdom is also represented with the completed Dartford crossing toll road, the awarding of franchises for two bridge routes, and the Birmingham Northern Relief Road.

Israel is planning a 300 km multi-lane highway which will involve private investment and the use of transponders for billing purposes.

In New Zealand, the prime minister announced his support in 1996 for private sector construction of toll roads – as long as motorists had the choice of a free route. Malaysia has actually implemented this philosophy but is debating removing the restriction where the new road is necessary to improve safety.

Also in New Zealand, Infratil has a heads of agreement with the Rodney District Council to fund, build and franchise a road across the Weiti river in the Whangaparoa peninsular, north of Auckland. Currently the proposal is the subject of an environmental impact study. If the road goes ahead, it will be the first privately owned toll road (other than special purpose roads) built in New Zealand in recent times.

New Zealand is well on the way to making the provision of road design, supervision and construction contestable. In respect of state highways, all this work has been bid for in open competition since 1 July 1991. Robin Dunlop, general manager of Transit

The combined savings in maintenance and management of state highways amounted to approximately $135 million during the five years.

Some local authorities have recognised the benefits of greater private sector involvement more quickly than others. The tardy ones tend to be victims of the usual problems of conflicts of interest, anti-private sector ideologies and ineffective leadership. Conflicts of interest arise where a purchaser of services is also a provider or a regulator. Ineffectual leadership means public debate is limited to matters of rhetoric, emotion and self-serving defence of cross-subsidies and does not address the core matters of service quality, reliability and unit cost.

Generally speaking, the larger local authorities have been the least innovative, and their decisions have the greatest impact on the national economy. As in the cases of Papakura with water and Rodney with roads, it is the smaller local authorities which are leading the way. The Wellington Regional Council (WRC) and the Auckland Regional Services Trust (ARST), for example, stand out for their resistance, if not outright opposition, to divestment. What can explain the fact that the ARST still owns a bus company many years after the Wellington City Council privatised its bus service, with major benefits to local commuters?

As the World Bank has cogently argued, ownership matters. Incentives to manage resources efficiently are stronger under private ownership. The leading opponent of privatisation in local government is Stuart Macaskill, chairman of the WRC. His stated reasons for opposition in the case of water are becoming increasingly eccentric, the latest being that it would lead to riots in the streets. Strangely, we do not seem to hear of water riots in Papakura, Waiheke Island, Oamaru and the many cities in Britain, France, Australia and the United States that depend on private supplies or plan to do so. The WRC's opposition to the Wellington City Council's decision to put its contract for the maintenance of its water supply system out to competitive tender simply highlights the potential for conflicts between the WRC's interests as a provider and the interests of end users.

With the road network currently being subject to central and local government decision making, two concerns arise. The first is that new investment may not be forthcoming in a timely manner where it is most needed. The second is that the existing infrastructure is not being operated as efficiently as possible. In both cases there appears to be a need for greater urgency in reducing barriers to more commercial approaches, including greater private sector involvement.

The general theme appears to be that consumer preferences for personal convenience and mobility should be ignored in favour of shared transport and higher population density living. However, as the communist nations found, human nature cannot easily be changed. Nor is it clear why the ARC believes that its proposals for achieving these changes will be effective. The less confident we feel about measures like light rail, parking charges and subsidies for off-peak bus travel, the more urgently we should look for direct billing systems and enhancements to capacity. Getting prices right across the Auckland transport system and maximising the incentives for investment and entrepreneurship on the part of all transport providers, including roading operators, is surely the key to the solution of Auckland's problems.

The general problem with current regional land transport strategies, at least in Auckland and Wellington, appears to be that local authorities have not clearly separated the overriding objective of providing an efficient road transport system from other objectives such as the regulation of safety and pollution. Nor are the issues of purchasing (or subsidising) services for pedestrians and others who may not pay the provider directly, or who may be deemed to justify subsidised transport, addressed separately from provider issues.

It is true that local authorities are constrained by legislation which complicates decision making or restricts their options. The very high cut-off benefit/cost ratios for capital works on roads are also worrisome in this regard. But the difficulties are compounded by the failure to treat separate issues separately. This creates the all-too-common political problem of determining how to balance conflicting objectives and interests. The interests of environmentalists, pedestrians, cyclists and bus commuters do not necessarily coincide with those of other road users.

Separating the provider's objectives (using a state-owned enterprise (SOE) or a Local Authority Trading Enterprise (LATE) structure) from those of a regulator, purchaser or subsidiser would, I suggest, lead to much greater clarity and accountability for performance in respect of each role – and it would lead to different statements of objectives. For example, who would dream that Telecom would set a goal for a target decrease of no more than 10 percent in the quality of its service between 1991 and 2011 because of the growth in demand? But the ARC's 1995 land transport strategy document proposed just such a reduction in the quality of service (as measured by average travelling times) to be delivered to non-passenger motorists between 1991 and 2011. Even more egregiously, the WRC has adopted a bizarre anti-motorist policy which states that the capacity of the road system should never be expanded to cater for peak demand. Recently the WRC's deputy chairman indicated that he favours abandoning the policy, and it must be hoped that sanity prevails.

In respect of roads, users should be expecting the providers of road services to develop much more efficient billing and charging systems. Rather than trying to change user preferences in the face of current prices, providers should be aiming to satisfy these preferences at least cost. Far from trying to restrict growth in demand where there is a willingness to pay, providers should be keen to cater for that demand.

The use of rates for funding a road network operated on more commercial lines should diminish. Such a source of revenue is not relevant for other network industries, the state highways, the extensive private roads which exist in New Zealand to serve forestry and agriculture, and the construction of roads for new subdivisions. Councils might use ratepayers' money to subsidise certain groups or to purchase bus or other transport services, but the network provider would just treat any payments it received as another form of revenue. As an interim arrangement, funding could be by way of shadow tolling or other forms of contracting. Any of these options are likely to increase the pressures on central and local government to sort out the proper distribution of the money currently being raised from road users.

Achieving further gains in these areas is the challenge for roading operators in the next decade. In my view, the broad direction for further reform is clear. Earlier transport sector reforms separated the functions of policy advice, regulation and provision among central government agencies. Road funding has now been separated from provision with the creation from 1 July 1996 of Transfund New Zealand. New Zealand is so far the only country to have established a separated dedicated funder of roads with an independent board, although Kenya has developed a dedicated fund for maintenance expenditure and others are considering the idea. This separation should result in much greater clarity about what services the road infrastructure is required to deliver.

In terms of organisational reform, the next challenge for New Zealand is to convert the providers of state highways and local roads into SOEs or LATES. Such structures will improve incentives, accountability and clarity about what is expected from providers of the network.

Closely related to institutional evolution is the issue of road pricing. Road pricing has long been bedevilled by the inefficiencies of direct billing system technologies available until recent times, and the usual mix of problems which face government providers – multiple and conflicting objectives, weak incentives, divided interests, ad hoc political interference and lack of quality information about users' willingness to pay.

If charges for road users could more closely reflect the quality of the infrastructural services being provided at the location and time of use, providers would be in a much better position to ascertain what value users put on improvements in surface quality, safety and capacity, and user demands would better balance benefits and costs.

Reflecting a general awareness of such factors, interest in congestion pricing has continued to grow. Several large firms have entered the field of electronic toll collection. Technological change has now brought efficient billing systems into the planning time horizon which is relevant to the institutional reforms just mentioned. Transit New Zealand has stated that "reliable direct revenue collection should be available within 5–10 years". Other countries are already well ahead of New Zealand in implementing such technologies.

For example, all three of Norway's largest cities, Oslo, Bergen and Trondheim, use electronic tolling and were reported by the Reason Foundation to be considering implementing peak/off-peak pricing. Singapore started its electronic toll road (area district licensing) system in 1994. It first introduced peak-time pricing in June 1995 on the East Coast Parkway. It is extending the scheme for morning peak-hour travel to the Central and Pan-Island Expressways from May 1997.

According to newspaper reports, a Swedish-based company has just been awarded a A$40 million contract to supply electronic tolling equipment for Melbourne's A$1.8 billion City Link tollway project. The contract involves the supply of transponders for over 600,000 vehicles and associated roadside equipment. This is equivalent to supplying transponders for about one third of New Zealand's registered motorised vehicles at an average capital cost of about NZ$75 per vehicle. Cars will be automatically billed for the use of the tollway without having to stop. The southern link component of the new tollway is expected to be completed by December 1999.

In the United Kingdom, two types of electronic system are being trialled on a special test track. Commentators envisage cars paying 1.5p a mile and lorries 4.5p a mile. The European Union has an ongoing research programme on electronic tolling. Many cities (including London, Stockholm, Amsterdam and Rotterdam) have initiated, or are in the process of initiating, detailed studies of road pricing.

In the United States, the world's first non-stop toll road has been constructed in the SR-91 Express Lane project located outside Los Angeles. This road is 10 miles long and four lanes wide. Vehicles with fewer than three passengers have to pay a toll. This road is reported to be making money for the operator. Automatic tolling is being tested on the Interstate 80 Carquinez Bridge. In New Jersey, the state assembly recently passed a bill authorising the state's three highway authorities to install a tolling system in which bar codes on cars would be read by lasers. An eight-year contract valued at about US$500 million has been awarded.

In Hong Kong, the first 'red-chip' tollroad company was listed on the local stock exchange in January 1997. It has six road projects in the Guandong area. Australia also has a publicly-listed road infrastructure project – the Hills Motorway Trust which is funding the construction of the M2 Motorway on Sydney's North Shore. In Malaysia, some roads are being privatised for road safety reasons.

Transponder-based systems may be used for other purposes, such as the provision of traffic information to passing motorists, automated 'smart pump' fueling systems and the detection of traffic offences.

Better information about user willingness to pay, and the strengthened incentives with more commercial arrangements to relate benefits to costs, should result in improved maintenance and capital expenditure decisions by road operators.

In the absence of commercial billing technologies, revenues would have to continue to be derived from less flexible tax- or levy-based systems. Typically these systems do not allow time-of-day or route-specific charges. While shadow tolls could be used as a source of revenue related to traffic volumes for a privately or publicly owned provider, traffic volumes are an imperfect proxy for the services which are being provided.

Shadow tolling could facilitate private sector participation in operating roads through franchise arrangements and related structures. These include the many variants of private involvement in building, developing and operating roads.

The Land Transport Pricing Study discussion papers released last year commented favourably on the possibility of direct charges for peak-time use of the Auckland Harbour Bridge and of State Highway 2 from the Hutt Valley to Wellington. In general, however, these papers only represented a very limited step towards the adoption of more efficient pricing arrangements, which is disappointing. In my view the government should give consideration to making Transit New Zealand (and local authority providers as appropriate) responsible for proposing more efficient pricing arrangements. This is the task of the provider in other network industries, and arguably we should be moving in the same direction in respect of roads.

There are many ways in which local authorities could involve the private sector more intensively in the provision of road network services. One option would be to simply call for tenders from private firms to build, enhance or maintain some component of a network to a defined level of service. There are many possibilities for the design of such contracts. For example, they might be awarded on the basis of the least cost bid or on the basis of traffic count.

Franchise arrangements combine public sector ownership and regulation with private sector provision. There are a number of risks here. One is that the relationship between the regulator and the provider will become unduly cosy. Economists call this regulatory capture. Performance can be expected to fall if tenure is likely to be assured. An opposite risk is that the incumbent will allow the asset to run down towards the end of the lease – because of the risk that the benefit from further investments will accrue to a competing bidder. A third risk is that the detailed regulation which is implicit in the franchise contract will inhibit flexibility and innovation. The public authority's lack of good information about user willingness to pay and its own mixed incentive structures create these difficulties.

For such reasons consideration must also be given to the long-term goal of full privatisation of road networks, subject to as light-handed a regulatory environment as can be achieved. This option is by no means beyond contemplation.

For example, the British government has been considering privatising the country's road system. In 1996, the Transport Secretary, Sir George Young, was reported to have drawn up plans for seven regional corporations which would take over the roads in return for petrol taxes and car registration fees.

In conclusion, I have no doubt that, as in other countries, private sector involvement in the provision of road infrastructure in New Zealand will continue to grow. I also have no doubt that greater private sector involvement, institutional reform of public sector provision and more efficient billing technologies have great potential to raise efficiency in this important area of economic activity.

The greatest concern that I and others in the business community would have is that this is yet another area in which New Zealand is moving too late and too slowly. I am aware that the legislative and other barriers in the way of reform are very real. But it is surely fair to ask why central government and councils are taking so long to address these issues. In the meantime, it is hard not to feel anything but disquiet about the response of the roading authorities in Auckland and Wellington to the problems of growing congestion. Experience overseas shows that congestion can become extremely severe if capacity does not adjust to meet demand. With an economy that is achieving higher average growth than in the past and which could do much better yet given continuing reforms, the economic costs of poor roading policies could be very high.

1.2. In recent years there has been a growing shift in thinking about appropriate institutional and regulatory arrangements for the primary sectors, and a wider recognition of the extent to which the pervasive role and powers of the producer boards have cast a shadow over the meat and wool sectors. The sea-change in perceptions about the role of the boards in competitive and open markets has overtaken the outcome of the 1994 review of institutional arrangements in the meat and wool sectors undertaken by Federated Farmers and the introduction of the Producer Board Acts Reform Bill. There is now a great deal of questioning, including by people who are close to them, about whether the boards are needed at all.

1.3. The factors that make the industries covered by the Bill in any sense special are minimal. The very limited grounds for government intervention that exist do not warrant retention of the full paraphernalia of the boards. Moreover, their retention would guarantee a continuation of the byzantine manoeuverings, pressures and industry politics which characterise this industry like few others, and which divert commercial effort unnecessarily.

1.5. If producers wish to continue to fund promotion or research through a compulsory levy, they could use the provisions of the Commodity Levies Act 1990, modified as necessary to address its weaknesses.

2.1. This submission is made on behalf of the New Zealand Business Roundtable (NZBR), an organisation of chief executives of major New Zealand business firms. The purpose of the organisation is to contribute to the development of sound public policies that reflect overall New Zealand interests.

2.2. The NZBR has taken a close interest in the subject of agricultural marketing regulation. The system of regulation that governs the export of the major agricultural products and underpins the operation of the producer boards affects, directly or indirectly, nearly half of New Zealand's export trade. It therefore has a major impact on the performance of the whole economy. Unlike most other areas of government regulation, this set of interventions has merely been tampered with in the last 10 years.

2.3. Because of the economic importance of the topic and the lack of attention given to it by successive governments, the NZBR undertook a major independent evaluation of the present forms of intervention, including those in the meat and wool sectors. This was published in October 1992 under the title Agricultural Marketing Regulation: Reality Versus Doctrine. The study concluded that the poor performance of the meat industry over the previous decade reflected the fact that it was a victim of politics and vested interests which dominated industry developments at the expense of commercial incentives and marketplace outcomes. Likewise, it found that the pervasive influence of the Wool Board overhung the entire marketing system for wool like a giant shade tree, leaving the commercial participants stunted and fragmented.

3.3. No industries in New Zealand have suffered more than meat and wool as a result of years of government and producer board meddling. Uncertainty about the use to which regulatory powers might be put has discouraged investment, including foreign investment, in the industry. In the case of both meat and wool, this has led to industry fragmentation and a weak commitment to long-term marketing strategies.

3.6. The Bill therefore provides a unique opportunity to address current statutory impediments to the profitable development of the meat, wool and pork industries in the light of sound public policy criteria.

4.2. The interdependence and coordination of willing buyers and sellers in most markets is something that occurs without compulsion. The question is whether coordination that occurs through producers, processors and marketers acting without compulsion is insufficient on public policy grounds and must be supplemented by statutory interventions of the type contained in the Bill. In other words, is there any valid reason why these industries should be subject to different rules from those which now govern commerce in almost all other sectors of the economy, including much of the primary sector?

4.5. In the remainder of this submission, the foregoing criteria are applied to assess whether a positive case can be made for the statutory interventions and powers set out in the Bill.

5.2. Pure public goods are rare, if not non-existent, although many goods exhibit some of their features, such as some aspects of research and development (for example, because of the difficulty of excluding non-payers from the enjoyment of services funded by payers). If left to the private market, arguably not enough of these goods would be supplied.

5.5. Even in markets where externalities might exist, such as the provision of computer communications networks, competing firms often cooperate by standardising technologies or protocols without government intervention. Externalities might also be ignored by consumers and producers because of inadequately defined property rights (such as patent rights). In these cases, better defined property rights are likely to be a preferable alternative to centrally determined subsidies or taxes.

5.7. The bulk of levy receipts is used to fund promotion and research by the boards. It is doubtful whether many producers would voluntarily choose to fund these activities to the extent of 12 percent of their net income compared to using the resources for other purposes. The benefits (and costs) of levies paid by producers are, in reality, shared with consumers and the processors of the commodity. The producer's share is determined by the relative responsiveness (elasticity) of supply and demand for the commodity to changes in prices.

5.8. This raises the likelihood that the benefits producers derive from promotion and research into off-farm processes are less than their share of costs. It is unusual for producers of raw materials to finance the promotional budgets of processors and marketers. Depending on the price responsiveness of products, all or a proportion of levies paid by producers represent a wealth transfer to intermediaries and final consumers.

5.9. A recent study on the impacts of brand and generic advertising on meat demand in the United States concluded that, relative to increases in advertising expenditures, considerably smaller percentage reductions in beef prices are necessary to induce equivalent increases in consumption. This implies that funding of promotion may provide much lower yields to producers than expenditure (including research) aimed at reducing on-farm production costs. Another commentator has argued that ".…producers should prefer a research-induced decrease in production costs to an equivalent promotion-induced increase in retail price and to a decrease in marketing costs".

5.11. If nothing else, this potential implication shows the naïveté of the thinking behind the proposed function of the producer boards to increase demand for their industries' products. Even if this could be achieved by a continuation of the traditional emphasis on promotion, which is improbable, the pursuit of such a goal may reduce producers' net income.

5.12. Commercial judgments about the allocation of resources among promotion, research and other activities are made by businesses every day. However, compulsory levies paid to fund a variety of research, promotion and other board activities are a cumbersome mechanism to address the trade-offs involved. Accountability arrangements provide little protection against the risk that, as in the past, the resources of producers will be devoted to a narrow range of risky schemes. Resources may be over-committed to currently fashionable marketing or other strategies which, with the passage of time, prove to be ineffective.

5.13. The dynamics of continuously changing markets mean that no one person or organisation can know for sure whether resources are best spent on on-farm or off-farm development, whether research which reduces on-farm costs should be favoured over promotion, or whether generic or branded promotion provides superior returns. In other sectors, diverse and competing approaches by producers, processors and other market participants making their own investment choices allow successful strategies to emerge over time. However, these opportunities are thwarted in the industries covered by the Bill since the legislation continues to place decision making on the use of substantial producer-financed resources in the hands of a few.

5.14. The grounds for intervention to fund research and promotion that differ from those of most other industries are weak, and any benefits are unlikely to exceed associated costs. Promotion and research should be the responsibility of those who directly benefit and who are best placed to make the trade-offs involved. At most, producers should have access to the mechanics of the Commodity Levies Act 1990 (modified if necessary) if sufficient numbers decide to collectively fund promotion and research.

6.1. In Part VII the Bill provides for the Meat Board's current grading powers to be replaced by the power to establish carcass description systems, with the point of compulsion shifting from the point of export to the meat processing plant. Under Part VI the Board will have powers to set quality standards for export meat quality that do not relate to hygiene or importing countries' sanitary requirements (which are the province of the Ministry of Agriculture). Part IV provides for the board to impose export requirements in response to restrictions imposed by authorities in export markets.

6.6. Despite the protections in the Bill, the powers of the producer boards in respect of the above requirements also represent a risk to stakeholders and make the sector less attractive to investors. Some powers, like those relating to the imposition of export requirements for meat in Part IV, are broad and would be exercised only in response to restrictions imposed by authorities in overseas markets. However, in the event of such restrictions being imposed, an individual company could be adversely affected by majority decisions, which means that commercial risk in the industry is unnecessarily increased.

6.7. Moreover, to the extent that market restrictions or requirements do not relate to valid hygiene or sanitary concerns, they amount to non-tariff barriers in respect of which remedies are being developed under the rules of the World Trade Organisation. It is therefore doubtful whether the full range of restrictive powers set out in Part IV is either required or appropriate, since it is conceivable that their existence might invite the imposition of non-tariff restrictions.

6.8. In summary, the NZBR concurs with the minister of agriculture that grading powers should be removed from the Bill. Likewise, the ability of the boards to set quality standards in Parts VI and XVIII should be removed. This will ensure that statutory interventions do not cut across normal market signals that suppliers convey to consumers, nor impede the independent enhancement of brands and reputation.

7.1. As part of its powers to impose export requirements, the Meat Board will be responsible for establishing and administering mechanisms for the allocation of access to tariff quota markets (provided under Part V of the Bill).

7.3. The issue of access to tariff quota markets is now a relatively minor one. The administration of export licences and other valid export restrictions is more appropriately a government function (as was the case with import licences) than an industry function. The job of devising and allocating quota access could be given to a small, special purpose agency with a limited life set up for the purpose. Alternatively the job could be given to the Ministry of Agriculture (which, prior to the advent of the Ministry of Fisheries, had responsibility for allocating quotas for fish stocks).

8.1. A review of the grounds for statutory intervention shows that valid grounds for intervention (taking account of associated costs) potentially exist only in respect of markets where access or other restrictions apply, and this justification is likely to apply to just one market (the European Union), and for a limited period. This ground for intervention does not justify maintaining the infrastructure of the boards as envisaged by the Bill.

8.3. The above incentive problems are heightened because the objectives of producers may conflict with those of the boards. The interests of producers may be better served by the boards distributing their reserves or liquidating assets and returning the proceeds. The interests of management or of the boards may lie in retaining earnings and investing in politically popular ventures that, due to poor returns or risk, would not be undertaken by an entity subject to normal commercial disciplines.

8.4. A further point is that, because of the conflicting objectives of producers and the boards, spending on favoured marketing or research strategies may not accord with producers' spending and investment preferences. The preferences of producers are unlikely to be uniform because they face vastly different circumstances. Many are currently hard pressed to pay for necessities such as food, housing and basic farm maintenance. They could be expected to put a low priority on promotion or the retention of non-core assets by the producer boards compared to retaining the levies they pay and receiving cash distributions from board reserves, both of which would increase their disposable incomes (in the order of 12 percent for the average sheep and beef farm). Producers who wish to invest in commercial assets could do so independently of the boards. Boards cannot reflect the preferences of each producer since their decisions affect all producers.

8.5. A similar point arises in respect of risk taking. The willingness of producers to take financial risks differs. The sale of the boards' remaining assets and the discontinuance of levies would reduce the risk producers face, or would enable them to manage their own risk according to their preferences. Many producers have limited opportunity to influence the decisions of the boards and have few options to offset the effect on them of adverse decisions. It is very costly, for example, to convert land uses to other, less encumbered activities.

8.6. As entities in which investors are captive, performance measures for the producer boards stipulated by the Bill, such as five-yearly reviews, while probably superior to none at all, are a pale reflection of the disciplines that apply in the private sector. The 1992 collapse of the kiwifruit industry occurred immediately after a statutory review which did not identify the serious weaknesses in the Kiwifruit Marketing Board's operations. Most importantly, it is simply impossible to establish the counter-factual through such reviews - what return could producers achieve if they had the ability to make alternative investments? Likewise, attempts to require more elaborate procedures for political accountability, for example by approving annual plans, requiring three-yearly votes or scrutinising spending by the boards on major initiatives, are merely a palliative. Such approaches confuse the role of stakeholders and management and do not address the fundamental weaknesses that arise from a reliance on political rather than commercial accountability.

8.7. These differences between producer boards and an investment vehicle in which stakeholders directly hold ownership interests mean that, on average and over time, resources invested through the boards are likely to achieve lower returns than if those resources were invested directly by producers. History to date underscores this conclusion.

8.8. The existence of the boards and their statutory powers also keeps alive the fallacy of 'producer control' that has bedevilled primary industries for decades. This fallacy is still manifested in movements like Farmers for Change and Meat and Wool Levy Payers, and has led to endless inquiries like the Weir Committee, the Cullwick Committee and the review that preceeded the present Bill. Wool, meat and pork processors and exporters, politicians and unions can all fall into the trap of believing that if only they could use the resources and powers of the producer boards to achieve the right interventions or industry strategies, the forces of economic gravity would somehow be defied and downturns in markets that are beyond anyone's control would be reversed.

8.9. However, all the meetings, reviews and movements reflect a failure to understand the disciplines of competitive markets and sustain naïve ideas about collective ownership that are little different from those espoused in the former Eastern bloc. They divert a great deal of time and energy of industry participants which would be better directed to business activities, whether on or off the farm.

8.10. The false sense of 'producer control' induced by umbrella organisations like the boards also diverts the attention of producers and others from the development of more conventional and successful forms of cooperation and coordination that are typical in other sectors (such as sophisticated purchase contracts where there is seasonal demand or supply). Rather than trying to tamper yet again with the architecture of the boards, they should be dispensed with once and for all.

9.1. The meat and wool industries have been prone to regular crises for the past 20 years. Their development has been plagued by government and producer board interference that has been grossly distorting. They are also continuing to suffer from the effects of inappropriate controls in the dairy sector.

9.2. Existing structures in the meat and wool industries were criticised in the NZBR report Agricultural Marketing Regulation: Reality Versus Doctrine (1992). Since that time there has been a significant shift in thinking and a wider recognition of the extent to which the pervasive role and powers of the boards have cast a shadow over the sector. Even the review of institutional arrangements in the meat and wool industries undertaken by Federated Farmers in 1994 and the introduction of the Bill have been overtaken by events. There is now a great deal of questioning, including by people who are close to them, about whether the boards are needed at all.

9.3. The meat and wool industries are slowly recovering from the adverse effects of past interventions. There is no reason to believe that both industries, and the pork industry, should not have a good future. However, to secure a viable future, these industries must match the rates of improvements in innovation and productivity of other sectors in a better performing economy. Otherwise, they will lack profiability and be unable to compete successfully for resources. The sectors must therefore be freed from all unnecessary handicaps and distractions.

9.4. This submission has established that any special factors that make the industries covered by the Bill stand out from others are minimal. The very limited grounds for government intervention that exist do not warrant retention of the full paraphernalia of the producer boards. The only significant one which remains valid for the time being is access to quota markets with significant rents, and this could be handled by giving licensing powers to a government agency. Moreover, retention of the boards leaves open the likelihood that the sectors will continue to be plagued by political manoeuvering and pressures which divert commercial effort unnecessarily.

9.6. In either case, the proceeds or shares could be distributed on the basis of previous levy payments. Reconstituting a producer board as a conventional company subject to normal commercial disciplines would be appropriate if it is desirable to retain the assets of the boards, including ownership of brands that have a positive market value. Once reconstituted, the new entities would be as free as any other company to engage in joint ventures, purchase commercial operations or charge royalties for the use of brands they own. Likewise, producers would be free to retain or sell their interests in the new entities.

The focus of this paper is on options for greater private sector involvement in the water and wastewater sector. This is not to suggest that I think privatisation is the only option for reform. To the contrary, I believe that substantial economic and environmental gains can be achieved by steps such as metering of water, efficient pricing, establishing Local Authority Trading Enterprises (LATEs), reorganising bulk and retail supply arrangements and improving institutional arrangements for water allocation, particularly by introducing clear property rights and tradable permits. These topics were the primary focus of the 1995 New Zealand Business Roundtable report Reform of the Water Industry. Only five pages of that 150 page study were devoted to consideration of the benefits of privatisation – although inevitably they attracted the most attention.

My impression is that the general arguments presented in that report on commercialisation and structural reform issues are now fairly well accepted among water industry managers. Opposition to these concepts comes mainly from organised interest groups and politicians. But there is a large gap between conceptual thinking and implementation. Actual reform in the industry is still proceeding at a snail's pace, and opportunities to achieve both economic efficiency and environmental goals are not being taken.

Steps short of full privatisation should probably be the first priority in a reform programme. However, given the state of professional thinking, a discussion of the possible additional gains from privatisation may be of greater interest than a general rehearsal of the benefits of commercialisation. Although privatisation is perceived by many in New Zealand as a controversial issue, I would be surprised if most industry professionals did not also see advantages in various forms of private sector involvement in the water industry. Already substantial efficiency gains have been achieved by most councils through contracting out council services to the private sector (for example, refuse collection, road maintenance, pipeline repair and so on). There is every reason to suppose that many aspects of the supply of water services offer the same potential.

This paper begins by reviewing the general case for privatisation, with emphasis on the local government level. I then discuss the variety of ways in which overseas countries are privatising their water and wasterwater industries. In the final section I review the progress that is being made in New Zealand in reforming the industry and examine some of the arguments that continue to be raised against corporatisation and privatisation.

The conversion of government trading departments to state-owned enterprises (SOEs) and the exposure of their markets to competition have brought large efficiency gains, as even former critics of these reforms now acknowledge. But the further issue of public or private ownership also matters. There is now a large body of evidence that, on average and over time, privately owned businesses perform more efficiently than state enterprises. Around the world the first wave of privatisation of state businesses has been followed by privatisation of various utilities (for example, ports, airports, telecommunications, electricity, water and roading), and the current wave is seeing an extension into social services such as health and education. The inescapable fact is that businesses exposed to the disciplines of capital markets and monitoring by interested owners have stronger incentives to perform than those merely subject to political oversight.

Short of full privatisation, other options for private sector involvement in infrastructure provision can also bring significant efficiency benefits. However, because none of them entirely severs the relationship with government, the fundamental incentive problems of government ownership will remain. In addition, these arrangements all require an ongoing contractual relationship between the private sector and the government. The complexities of managing such a relationship should not be underestimated, and governments are often influenced by political rather than economic priorities.

Increased involvement of the private sector can bring skills and know-how that is not otherwise available to governments. In particular, the private sector can mobilise finance for new investments when governments are hard-pressed to raise funds for the large outlays required for infrastructure investments, and it is better placed to manage business risk. Businesses can be set free to develop long-term business strategies, which may include an international dimension. Privately owned water utilities in France and England, for example, are a new source of competitive advantage for those economies and they are marketing their services worldwide. Taxpayers' and ratepayers' equity in such publicly owned businesses cannot responsibly be put at risk in such activities.

Long-term local government ownership and operation of water and wastewater assets is not a desirable option. With continued public ownership we are likely to see:

These difficulties will be particularly severe if councils fail to establish LATEs. However, experience suggests that the gains from corporatisation become eroded over time as political interference re-emerges. One of the additional benefits of privatisation is that it locks in the gains of corporatisation.

Three recent reviews of privatisation experience provide empirical support for the general case for private ownership, including of utility businesses.

The first study, conducted by the World Bank, looked at the post-privatisation performance of twelve companies (mostly airlines and regulated utilities) in Britain, Chile, Malaysia and Mexico. It carefully separated the impact of privatisation from other influences in comparing the performance of the companies before and after privatisation. The study concluded that net welfare gains resulted from privatisation in eleven out of the twelve former state enterprises.

A second report by the World Bank reviewed a much larger sample of companies – 61 companies in 18 countries (six developing and 12 industrial) and 32 industries – that had been privatised through outright sale. The study found that following privatisation, efficiency improved on average by 11 percent; investment increased by 44 percent; output increased by 27 percent; employment was up by 6 percent; and profitability and dividends were significantly higher.

The third study, conducted by the Reason Foundation, compared privately owned and government-owned water systems in California. This study is particularly interesting because it focuses specifically on water, and for two other reasons. The first is that private water companies in California are heavily regulated and there is no a priori reason to assume that in such an environment they would consistently outperform government-owned firms, given the poor incentives to increase efficiency. Secondly, the government-owned companies received special treatment in the form of tax subsidies, excess cash balances and investment income. Yet despite these factors the study found that, because they were substantially more efficient, the privately owned companies provided water services to consumers at the same price as government-owned water companies without subsidies or tax exemptions. For example, the government-owned water companies had 3.49 employees on average per 1000 connections, more than twice the level of private companies, and salaries were much more inflated in the public agencies – over 37 percent of operating revenues in the public sector companies against 13.4 percent in the private ones. The study concluded that government provision should be terminated, with the financial savings being applied to tax reductions or higher priority government programmes.

The evidence on the general benefits of privatisation is now decisive. As the World Bank put it in the 1996 World Development Report, there is little doubt that private ownership is a significant determinant of economic performance in established market economies. Opposition to privatisation can now only be based on ideology, not logic and evidence.

The British experience with water industry privatisation is often criticised. Indeed it seems to be the only example of water privatisation known to Alliance politicians and many journalists, and they seem to think it demonstrates the failure of privatisation.

The heavily regulated approach adopted by the British government is certainly not a model that commends itself. In many ways the industry swapped a government owner for a government controller and regulator. However, it is important not to overlook the context of privatisation in Britain. Substantial investment was required to enable the water companies to catch up on maintenance which was neglected when they were under political control, to meet strict European Union environmental standards (whether justified or not), and to improve the quality of drinking water. Funding this investment meant that, regardless of privatisation, prices would rise and consumers who did not value such quality improvements would be dissatisfied. In fact, charges have risen in all European Union countries, in part as a result of the need to finance investment needed to meet higher quality standards.

Furthermore, a rise in prices following corporatisation or privatisation is not necessarily an indicator of policy failure. If prices were previously held down artificially – for example through failure to undertake adequate maintenance of assets, or for political reasons – over-consumption and other distortions would occur, causing resource misallocation and environmental damage. Artificially low prices are as harmful to society as artificially high prices – the goal should be to promote efficient pricing.

In respect of pricing, it should also be mentioned that the lack of metering in Britain has restricted the efficiency gains that might have been expected from privatisation – only 7 percent of domestic households have meters. Ninety-three percent of households still pay on the basis of rateable value (property values previously used by local authorities for raising revenue).

It is sometimes suggested that the rate of investment being undertaken by the private British water companies is sub-optimal. However, determining the optimal rate of investment is not straightforward. In an unregulated market, private owners have strong incentives to optimise the extent and timing of their investments. Firms maximise their profits by investing in projects to provide services which customers are prepared to pay for. It is possible that the regulatory regime in Britain is distorting the investment incentives of the private water companies. If the private utilities fear that the regulator will not allow them to set prices that cover the costs of future investments, they may indeed be reluctant to commit to capital projects.

Despite these significant weaknesses in the implementation of water industry privatisation in Britain, the balance sheet of the results is clearly positive. Real improvements in drinking and bathing water quality have been achieved, and efficiency gains made. For example, Anglian Water reports that compliance with drinking water standards has increased from 98 percent in 1989 to 99.6 percent in 1995; compliance with wastewater standards has increased from 80 percent to 98.7 percent; and the loss rate from the distribution system has been reduced from 16 to 13 percent. Customer service has also improved. Importantly, Anglian Water has estimated that (as at 1993/94) prices were 13 percent lower than they would have been if the company had remained in government ownership. Whatever the merits of the debates about issues such as the salaries of managers in the water industry, such cost factors have been swamped by these efficiency gains.

Many governments are proceeding with privatisation because they are convinced of its benefits. Robert Poole of the Reason Foundation noted in an address in New Zealand last year that the sale of state-owned enterprises around the world totalled US$66 billion in 1995, bringing the 10-year total of such sales to US$535 billion.

The worldwide trend towards increased private involvement in infrastructure assets has extended to the management, operation and ownership of water and sanitation assets. Increased private sector involvement has been achieved through management contracts, leases, concessions, build-operate-transfer (BOT) schemes and, of course, divestiture.

Management contracts transfer responsibility for the operations and maintenance of government-owned businesses to the private sector for a relatively short period (three to five years typically). Such contracts leave responsibility for all investment with the government owner of the assets. Management contracting is likely to be most useful where the primary objective is to enhance the technical ability of a utility to perform specific tasks. Management contracts can be used as a first step towards private involvement where current conditions make it difficult for the government to contemplate other forms of privatisation, or where it is difficult to induce the private sector to commit capital or take commercial or political risks.

Management contracts have been adopted in Colombia, Malaysia, Trinidad and Tobago, and Turkey for water services, and in the United States for both water and sanitation services. In Mexico City, management contracts have been used as an interim step to improve information about the state of the system prior to seeking investment commitments from the private sector. Management contracts are being considered in Angola and Albania.

Another option involves leasing infrastructure assets to the private sector. Under a lease arrangement, a private sector company takes responsibility for operating and maintaining the assets. In a well structured contract, the private sector partner accepts a significant share of the commercial risks. For example, the contract may allow the private sector party to increase its profits by cutting its costs. Leases have been used where there is scope for gains in operational efficiency but only limited need or scope for new investment. The responsibility for financing new investments remains with the government owner.

Leases have been used extensively in France and Spain and are currently in place in Guinea and Senegal.

One of the preferred approaches to increasing private sector involvement has been the use of franchising concessions. Under a concession, the private company takes on full responsibility for the operation and maintenance of the asset, as well as for investments. Asset ownership remains with government. The concession approach passes full responsibility for operations and for raising finance and investment to the private sector for a period typically of 25–30 years. A concession arrangement can harness private sector incentives for efficiency across a range of the utility's assets. Administration of the concession by the government is, however, complex.

Concessions have long been used in France. This approach has now been adopted by a number of developing countries. In a recent report the Global Environment Fund identified more than 150 recently completed, ongoing and soon-to-be awarded projects, involving more than US$25 billion in private investment. Most of the projects involve private concessions in water and wastewater management. Examples include a US$4 billion concession awarded in 1994 to a private sector consortium for operation of the Buenos Aires water and wastewater operations, and a US$1.2 billion concession awarded for Santa Fe's water and wastewater system in 1995. Concessions have also been granted in Brazil, Colombia and Mexico, and are under consideration (or in the process of being tendered) in Bolivia and Ecuador. A US$2.2 billion concession for the operation of the Casablanca (Morocco) municipal water, wastewater and electric operations was negotiated in 1996. Malaysia awarded a US$2.8 billion country-wide wastewater concession in 1993 to a private consortium. A US$1.3 billion water concession has been granted in Thailand. The Philippines government recently announced the US$7.5 billion privatisation of the Manila water supply through a concession arrangement.

Build-operate-transfer (BOT) arrangements are similar to concessions, but are generally used for new projects. The primary advantage of this approach is that it can mobilise private sector incentives and finance for costly new investment projects. Variations on this approach include BOT arrangements in which ownership remains with the private sector.

BOTs are being used to develop the major new treatment facilities for Sydney's water supply, and proposals for sewage collection and treatment are being considered. A BOT has been adopted by Wellington City Council for its wastewater treatment plant. BOT concessions have been granted in Colombia, Shanghai, Turkey and Oman. Future BOT wastewater and/or water concessions have been announced in Brazil, Chile and India.

The final option, that of divestment of water or wastewater assets, transfers to the private sector full responsibility for operations, maintenance and investment. Probably the greatest benefits, including the minimisation of the risks of political interference, are available under this option.

Asset sales have been used widely for the privatisation of non-water infrastructure assets. In the water industry, by contrast, large-scale asset sales have to date been confined to the privatisations in England and Wales. Private water companies have, however, operated for a long time in the United States, and some privatisation of water and wastewater assets has occurred there. Chile is considering asset sales (or a concession). A tender of a 25 percent stake in Budapest's municipal water company is proposed for 1997/98.

Compared with the momentum of reform of water utilities around the world, progress in New Zealand has on the whole been extremely slow. Debate seems to have foundered on the same hoary arguments that were raised against earlier corporatisation and privatisation proposals.

For example, Stuart Macaskill, chairman of the Wellington Regional Council and former president of the then Local Government Association, has repeatedly come up with spurious arguments against privatisation and contracting out. Recently, he opposed the decision by the Wellington City Council to tender out maintenance of its water supply and argued that his council should be given a regional monopoly. Fortunately, the replies by the mayor and other Wellington City Council members were robust: the regional council had been slow to fix leaking pipes, it had done a "lousy job" and "he is trying to protect his patch".

It is sometimes suggested that because water businesses have some 'natural monopoly' characteristics they cannot be privatised for fear they will abuse a market position. However, if monopoly pricing is a concern with private ownership, it is equally a concern with LATEs, which also have commercial goals. Thus the issue of monopoly pricing must be considered at the time LATEs are established, and no additional issues are raised by privatisation. In my view, a light-handed regulatory regime, involving reliance on information disclosure and the provisions of the Commerce Act 1986, appears likely to interfere least with commercial decision making while providing a constraint on any market power that suppliers of water and wastewater services might have. Experience has shown clearly that cost padding and monopoly pricing were far greater problems in utilities such as ports and electricity supply authorities when they were under political control, and the same is almost certain to be true of water.

Another objection to the commercialisation of water businesses and charging for consumption is that poorer households would be harmed. This argument cannot be sustained. Low income households are often low users of water compared with those with swimming pools and large gardens which are subsidised by the rest of the community in the absence of metering. A study of the impact of changes to water tariffs on householders undertaken by the Wellington Regional Council concluded that "of those houses that would be worse off [from a change to usage-based charging], an assessment of the relationship to household expenditure suggests that for most households the cost increase would be affordable". This study did not take into account the efficiency benefits likely to be achieved by commercialisation. A recent editorial in a Chilean newspaper criticised a political party for opposing privatisation, warning that the common people of Chile would be the losers, "above all, those sectors with the smallest incomes".

If there are remaining concerns about the ability of some families to pay for water, these should be addressed directly through income support, rather than through sacrificing the cost saving and environmental benefits achievable by metering. However, the cost of water needs to be kept in perspective – the average weekly cost of water to a New Zealand household amounts to less than it spends on lotto and other forms of gaming. It is interesting to note that The Australian Financial Review stated in an editorial last year that "the politics of paying for water ... has never been a significant issue" in Australia. This may say something about the quality of the political leadership of some New Zealand councils.

An objection raised in the recent debate on the corporatisation of the Auckland City Council's water business was that "an essential commodity should not be treated as a profit-making business". However, water is an economic good like any other. People derive benefits from its consumption and, if it is priced correctly, will trade off the benefits of using additional water against other goods or services they might prefer. In any case, the Council must generate sufficient revenue to pay for the water services it provides. At issue therefore is how the revenue is raised, not whether it is raised. Most other essential commodities are provided by the private sector. Food, for example, is as essential to life as the small proportion of water use that is genuinely in this category, yet not even the Alliance would suggest that the production and distribution of food should be turned over to local government.

In opposing the establishment of a LATE, Auckland mayor Les Mills said that "he could not quite grasp the correctness of the principle of a wastewater user charge as wastewater disposal was a public good". While it is true that there are some 'public good' benefits from wastewater disposal (there are health benefits to neighbours from a household's safe disposal of waste), there are substantial private benefits as well. Levying a charge for the disposal of effluent would tend to reduce effluent and associated pollution. However, it is likely to be excessively costly to measure the discharge of effluent from residential and smaller commercial properties. Instead, it may be efficient to base sewerage charges on water consumption given the correlation between water use and effluent discharged into sewers. For industrial customers it would be efficient to levy charges based on the volume and concentration of effluent.

In the Auckland City Council debate, some councillors argued that corporatisation should be opposed because it might lead to privatisation. This is a bizarre form of logic. Privatisation might follow corporatisation if councils were satisfied that it would lead to further efficiency gains. However, the view that corporatisation must lead to privatisation seems to reflect an extraordinary lack of faith in democratic decision making. Privatisation only follows if council approval is given.

Another criticism of privatisation has been made by Wanganui Mayor Chas Poynter. He suggested that "when you privatise, the person who takes over wants a return and the ratepayer will end up paying more". This argument is also spurious. Government organisations, like private ones, must cover the full economic cost of all resources, including the cost of labour and a return on capital employed. There is nothing intrinsic to a government organisation which means it faces lower capital costs than private firms. The difference is rather who pays and under what conditions. Thus, while council-owned entities may receive a capital subsidy from the council (and ultimately ratepayers), this does not mean that they produce goods and services at a lower cost to society. Instead, it means that ratepayers providing the subsidies bear part of the cost of production. For example, the cost of equity to the council organisation is the opportunity cost of the invested capital. The cost is borne in part by ratepayers who forgo any return to their capital contributions. In addition, privatised businesses such as Telecom have dramatically lowered the cost of a bundle of services to consumers despite paying taxes and dividends because of the massive efficiency gains they have achieved.

Some progress in reforming water and wastewater businesses is being made. Many councils have reviewed the option of setting up LATEs or stand-alone business units for their water operations, and some have opted for corporatisation.

The Far North District Council is one council which is going ahead with establishing LATEs for its water and wastewater operations. Wellington City has adopted voluntary metering and, as noted, is tendering out the maintenance of its water supply. It has also contracted with a private company to convert the solid residual from sewage treatment into compost. The Lower Hutt and Upper Hutt councils have announced that they will be calling for tenders to design, build and operate a sewage treatment plant. Papakura District Council is one of the few councils that has opted for more extensive private sector involvement in its operations – it has decided to franchise its entire water supply and sewage disposal services to a private operator and has received four bids, three of which are from private companies and one from Watercare Services. Private forms of water supply have been in place for many years in Oamaru and on Waiheke Island.

However, despite the progress by some councils, overall the reform of the water and wastewater businesses is occurring at a glacial pace. It is extraordinary that Wellington City Council seems likely to opt to charge for water services on the basis of the rateable value of properties. Despite a great deal of work by industry professionals, many councils in Auckland and elsewhere are still debating whether or not to form their water operations into LATEs or business units. Decisions about future water supplies in Auckland remain mired in local politics. Central government is dragging the chain on removing obstacles to water industry reorganisation and more efficient pricing. Stuart Macaskill has even urged central government to put greater obstacles in the way of water privatisation. Businesses and residents should simply not be putting up with this totally unsatisfactory state of affairs.

While New Zealand is spinning its wheels, governments elsewhere are moving on, not just in other parts of the world, as noted earlier, but closer to home as well. The Victorian government has corporatised its water businesses, and privatisation may not be far down the track. In South Australia, a $1.5 billion contract has been entered into with British and French companies to supply Adelaide's water, and partial privatisation is underway in New South Wales. With moves afoot in other states, it is galling to see Australia, not known as a leader in microeconomic reform, moving well ahead of New Zealand.

The Business Roundtable report Reform of the Water Industry (1995) put the accumulated investment by local government in water supply and wastewater assets at around $6 billion in 1995. This is larger than the investment in Telecom's national network. Since the corporatisation of Telecom, the annual gains to the New Zealand economy have been estimated in a Victoria University study to be of the order of half a billion dollars, and the gains since privatisation have been at least as large as those in the SOE period. This could be the order of magnitude of the gains New Zealand is sacrificing by not pressing ahead vigorously with water industry reform. Councils and central government need a wake-up call, and they need it now.

This submission is made on behalf of the New Zealand Business Roundtable (NZBR), an organisation of chief executives of major New Zealand business firms. The purpose of the organisation is to contribute to the development of sound public policies that reflect overall New Zealand interests. Of particular relevance to the present submission is the NZBR's view that consumer interests should be paramount in developing a policy framework for any industry.

People have participated in gaming for thousands of years. It was practised in ancient China, Egypt and Greece, and among the Israelites who drew lots to allocate land among the tribes upon entry into the promised land. Gaming seems to be common to most nations and cultures.

Gambling has always been a pastime for New Zealanders. The Department of Internal Affairs (the Department) reported that about 90 percent of the population gambles each year. Those activities are obviously a source of enjoyment for people who choose to participate. This is best shown by their willingness to spend on gambling. Statistics New Zealand reports that, on average, households spent $6.10 a week or 1.0 percent of their weekly expenditure on gambling in 1994/95. This amount is broadly comparable to that spent on fruit ($7.40); pets, racehorses and livestock ($6.40); footwear ($5.90); and poultry and fish ($5.50). Such surveys typically understate spending on activities like gaming.

The vast majority of gamblers act responsibly. About 0.4 percent of the population aged 15 years and over (12,000) is reported to suffer from pathological gambling at any time and a further 2 percent are estimated to be problem gamblers. Some gamblers may have exhibited pathological behaviour in any event. Most costs that arise from problem gambling are borne by the participant and his or her household unit and not by other members of society.

Present regulation severely distorts the supply and consumption of gaming. Policies that target its misuse rather than responsible consumption are required. This approach is similar to that taken in respect of compulsive eating. The increased availability of food is rightly seen as a benefit of higher living standards, and strategies to address eating disorders are targeted at their specific causes. The problem does not relate to people who eat a lot, but to those whose excesses endanger their health. A similar approach in respect of gambling requires policies directly targeted at its misuse.

The supply and consumption of gaming are heavily regulated. Different forms of gaming are subject to a variety of restrictions that cannot be justified by valid public policy considerations. The provision of particular forms of gaming, such as betting on horse racing and the use of gaming machines, is largely restricted to certain statutory monopolies or licensed operators. Promoters and employees engaged in certain gaming activities are required to be licensed. Particular classes of enterprise, such as for-profit firms, are prohibited from the supply of most gaming activities. Government agencies are often preferred to other classes of providers. Unrelated activities, such as cultural and sporting pursuits, are subsidised by mandatory contributions (taxes) from gaming. Those disbursements are not subject to the same level of scrutiny that is applied to spending funded from general revenue.

These regulations and interventions extend well beyond those applicable to most other products and services. They reduce consumer welfare, impair competition and lead to higher prices and lower quality service than otherwise, waste resources from a community perspective and inhibit innovation.

The thrust of this submission is that the regulatory framework for the supply and consumption of gaming should be brought into conformity with that of other products, except where there are valid public policy grounds for industry-specific interventions. Many other products or activities – food, transport, sport and recreational activities and so forth – involve some risks to those using or taking part in them and the possibility of irresponsible behaviour, yet they are not subject to anything like the degree of control and taxation as gaming.

The prevention of crime and problem gambling is advanced by the Department as a valid reason for government intervention. The risks of crime with an open and competitive market for gaming are unlikely to be any higher than for comparable activities that are not subject to heavy-handed regulation. A possible reduction in problem gambling and the risk of crime is unlikely to justify the costs which the present restrictions impose on the vast majority of responsible gamblers. Some religious and other groups believe that gaming is morally objectionable. In a pluralistic society such views do not justify the imposition of restrictions on people who hold other views. Paternalism is a further reason that may help to explain the present restrictions on gambling. As we discuss later in the submission, the social cost argument for requiring gamblers to contribute to community activities and other industry-specific taxes is dubious.

Since 1984 successive governments have placed greater focus on their core role of setting the framework that enables individuals and firms to interact in ways that maximise community welfare. The supply of goods and services has increasingly been viewed as the function of private enterprise, except in certain exceptional circumstances. Competition has correctly been seen as the key to encouraging producers and distributors to satisfy consumer preferences at the lowest possible cost. The vast majority of New Zealanders endorsed these broad policy directions at the recent general election. The review provides an opportunity to apply them more consistently to the gaming industry.

There has been a gradual relaxation in controls on gambling since 1977 when the Gaming and Lotteries Act 1977 sought to make better provision for the conduct of games of chance, prize competitions, and lotteries for amusement and for raising funds for certain purposes. Earlier legislation had aimed to suppress many forms of gaming. Lotto was introduced in 1987. It now accounts for the largest share of the gaming market. The recent introduction of casinos represented a further step in easing the controls on gaming, and it re-established the principle that for-profit firms can be permitted to supply gaming services.

Although the Department proposes to rationalise and relax the present fragmented regulatory environment, its analysis needs to be taken further. The proposed policies, which are yet to be fully developed, do not go far enough in dismantling the heavy-handed and paternalistic regulation that distinguishes gaming from most other activities. In addition, the Department has not examined critically the government's involvement in the provision of gaming and in the distribution of the net proceeds to community organisations.

A regulatory regime that will command wide support and is therefore likely to be sustained should be put in place. The public appears to have broadly accepted recent relaxations in gaming restrictions. The number of submissions received on the first phase of the review (70) was modest relative to those received on issues of greater concern to the public. The present review of aspects of the Sale of Liquor Act 1989, for example, generated about 400 submissions. The constructive process adopted by the Department in carrying out the review will promote confidence. The presentation of a quality analysis from a public policy perspective and the pace at which change is introduced are also important. Transitional measures, such as the phase-in of low barriers to entry into the gaming industry, should take account of explicit commitments to existing operators, and private firms should be given an opportunity to adjust to the new environment.

The above measures would substantially increase the efficiency of gaming, thereby conferring benefits on responsible gamblers and on the wider community through a more efficient use of resources, including the reallocation of substantial administrative resources.

The balance of this submission is presented in seven sections. The next section (section 2) addresses the grounds for government intervention. The regulation of the supply of gaming and the minimum age for gaming are examined in sections 3 and 4 respectively. Section 5 focuses on gaming duties and the funding of community activities. Government ownership of gaming operations is discussed in section 6. Brief comments are provided on the Department's policy proposals in section 7. Our conclusions and recommendations are presented in section 8.

The central role of the government in relation to gaming and other industries is to establish a regulatory framework that encourages individuals and firms to take decisions that will maximise community or social welfare. The key task of the government is to define the set of rules that are most likely to facilitate the achievement of that objective. This overriding goal was omitted from the Department's paper.

These arguments are considered in turn.

The view that gaming is undesirable on moral or religious grounds has been a main reason for its prohibition or control in many countries during much of the twentieth century. Some religious and other groups argue that gaming is an act of greed, it undermines the work ethic, it is inconsistent with the biblical injunction to love thy neighbour, it represents an improper use of money and reliance on chance interferes with God's plan for man. These views are not shared by all religions or the vast majority of New Zealanders who participate in gambling. Only 6 percent of respondents to a 1990 survey raised such objections to betting on horse racing. Furthermore, the potential harm to society generally from gaming is not sufficient to justify constraints on individual freedom by banning gaming.

Controls on the classes of gaming activities that can be supplied to the public, on their availability, and on the ownership of providers, together with industry-specific taxation, are doubtful instruments for addressing moral concerns. They do not overcome moral objections to gaming.

The adverse social consequences of gaming, particularly those that arise from compulsive or problem gambling, are often cited as a ground for controls on gaming. The underlying premise is that addiction to gaming is inconsistent with rational behaviour and cannot therefore be left solely to individual choice. There are analytical and empirical reasons for rejecting this ground for intervention.

The traditional economic analysis of addictive goods treated addiction as a change in tastes (preferences). The consumption of the addictive product was postulated to increase the desire to consume and therefore to increase its consumption over time. The change in tastes was an alternative explanation to the possibility that increased consumption of the addictive product might be inconsistent with the view that marginal utility declined as consumption of a particular product increased. (This proposition is fundamental to a downward sloping demand curve.) Under the traditional view, tastes were "unchallengeable axioms of man's behaviour" that, "at least when held by an adult, are not capable of being changed by persuasion" (Stiglitz and Becker 1977). In an analogous context, Becker (1976) argued that the analyst had "succumbed to the temptation of simply postulating the required shift in preferences to explain all apparent contradictions to his predictions". Thus the traditional view offered little insight into the consumption of addictive goods and was inconsistent with the analysis applied to most goods and services.

Stiglitz and Becker (1977) challenged the traditional view. They argued that preferences neither change capriciously nor differ importantly among people. Thus "widespread and/or persistent behaviour can be explained by the generalized calculus of utility maximising behaviour" without introducing the assumption that tastes change. Stiglitz and Becker constructed a model in which beneficial and harmful addictions were dependent on a household production function that took account of what they termed "consumption capital". The model showed that harmful addictive effects are anticipated, as a result of which use is discouraged. Stiglitz and Becker also argued that harmful addiction is the result of an inelastic demand for the addictive product and not the cause of inelastic demand, as had previously been argued. The practical implication of this view is that, in the short term, increases in taxes on addictive products or activities are likely to have less effect on the demand for the addictive product by heavy users than on the demand by other consumers.

Becker and Murphy (1988) developed the analysis of Stiglitz and Becker. The former argued that addictions, even strong ones, are usually rational in the sense of involving forward-looking maximisation with stable preferences. In Becker and Murphy's model past consumption of the addictive product affects current utility through a process of "learning by doing" which is reflected in consumption capital. They defined a person as being potentially addicted to a product if an increase in his or her current consumption of the product increased his or her future consumption. This occurs if the person's behaviour displays "adjacent complementarity", where past consumption raises the marginal utility of current consumption.

Becker and Murphy suggested that a permanent change in the price of an addictive good may only have a small initial effect on demand but that the effect may grow over time. They also suggested that the demand for drinking and smoking could be quite responsive to price, yet the impact on demand for it by the most addicted might be modest. Stiglitz and Becker reached a similar conclusion. Becker and Murphy show that people who discount the future the most are more likely to become addicted.

The essential conclusion from this research is that addiction can be examined within a standard utility-maximising framework. Potential addiction does not provide valid grounds for government action but does provide insights into the impact of policies that have been advocated to restrict consumption of gaming and similar activities.

This literature does not address the situation where a person's addiction is so excessive that he or she is unable to make rational decisions. In these extreme circumstances, society may require the government to take decisions on behalf of the affected person. The appropriate intervention is unlikely to be restrictions on the provision of addictive products or the imposition of indirect taxes. It may, however, comprise the appointment of a guardian for the person concerned, restrictions on his or her attendance at gaming establishments and a requirement to undertake appropriate medical treatment. None of these courses of action justifies the present regulatory framework for gaming.

These analytical arguments are supported by the observation that pathological and problem gambling is confined to a small number of people, as noted in the first section of this submission. It would be surprising if the level of problems in comparable areas, such as eating disorders, was significantly lower. According to research reported in an economic impact study, gaming is a price elastic activity. This finding is inconsistent with the view that gaming is an addictive product.

The difference between private and social costs of gaming is advanced as a ground for regulating the supply and consumption of such activities. It is argued that significant costs arising from gaming are borne by society rather than the consumer or his or her household. Individuals are encouraged to consume excessive quantities of such services from a community viewpoint because they do not bear the full costs.

Externalities are pervasive and their presence alone does not justify government intervention. An externality arises, for example, when a passer-by gains pleasure from a private garden but the transactions costs of attempting to internalise such an externality (for example by charging for the enjoyment) would generally be excessive. Government action aimed at equalising private and social costs and benefits (or internalising social costs) can be justified only where the benefits of doing so outweigh the costs involved. The government might be able to address differences between private and social costs by specifying property rights (for example, the introduction of tradeable quota for fish), implementing subsidies or taxes, or regulation. These measures are not costless and thus the internalisation of all social costs and benefits is unlikely to be optimal.

A notable feature of gaming is that the cost involved is largely borne by the participant and his or her household unit. If, for instance, a gambler becomes addicted, the loss in income from gaming losses, reduced work effort or absenteeism falls on that person. Similarly, the cost of forgone consumption is borne by the affected household. The costs do not generally fall on other members of society.

It is sometimes argued that the failure of the government to charge for the costs of most public health services, including the treatment of problems arising from gambling, creates an externality which justifies the taxation of gaming. This view is mistaken. The consumption of health services by one person generally has no direct impact on the utility of other people. It is the government's decision to impose taxes to finance health services rather than the consumption of those services that affects the utility of other people. The disposable incomes of taxpayers are reduced and their choices are biased.

The point that the consumption of subsidised health services does not constitute an externality can be illustrated by comparing two equivalent policy options. In the first the government gives people a grant to fund their health expenditures. In the second, it provides health services free of charge to the user. In both cases the expenditure is financed from general taxation. Both options increase the income of health consumers and reduce the welfare of taxpayers. However, neither constitutes an externality. No respectable analyst would argue that an externality arises when a superannuitant uses New Zealand Superannuation to purchase his or her groceries, yet that is analogous to the consumption of subsidised health services. (The issue of applying user charges or industry-specific taxes to fund health costs is examined below.)

Another externality argument is that gaming leads to crime such as theft and fraud. There have been instances where accountants and lawyers have stolen client funds to sustain their gambling. While the extent to which gaming leads to crime that would not otherwise be committed is unknown, it is clearly limited. Moreover, gaming is not the only activity that leads to such crime.

The principle to be applied is clear. The potential criminal will face the true cost of his or her crime if the expected cost of committing offences is set at an appropriate level. This cost is affected by the probability of being apprehended and the size of the punishment imposed. If people face inappropriate incentives, the best action is to adjust the probability of being apprehended, for example by increasing the effectiveness or level of resources committed to apprehension, and/or the level of penalties imposed.

A related externality argument is that crime adversely affects the welfare of victims. While this is a valid argument, the best solution to this problem is to enable the victim to obtain some level of compensation from the offender (where feasible) and to design punishments and enforcement procedures to provide optimal deterrence. The problem is that fines are paid to the Crown and compensation available to the victim is often limited. This is a general problem that applies to all crimes and should be examined on a generic basis.

Another possible externality argument is that costs are imposed by gamblers on their families. These costs may arise from depression and domestic violence that is caused or accentuated by gaming losses and from excessive spending on gaming from the family's perspective. (External benefits may also arise, for instance if gaming were to reduce stress and depression.) However, losses from business investments may cause comparable external costs, but this would clearly not be a reason for seeking to suppress business investment.

If the family is viewed as a single unit, the possibility of a net external cost or benefit cannot arise. On the other hand, if individual members of a family are viewed as the appropriate unit, the possibility of an externality may arise. The solution to this problem centres on the rights and obligations of individual members of the family and their ability to enforce them. These include private agreements embodied in the marriage contract and customs, as well as the general legal framework (for example, prosecution for assaulting one's spouse or partner). Some costs imposed on families by one member are internalised, for example, when a family breaks up. The household unit often provides the appropriate unit of analysis because family members have greater scope to minimise the costs that they bear than strangers.

The government has a specific role in those cases where the interests of children are significantly at risk. The grounds for this action are that the parent as the agent of the child is demonstrably failing to act in the child's best interests. This general ground justifies the Department of Social Welfare's right to place children that are at serious risk of harm, perhaps through neglect, in foster care.

The misallocation of spending from the family's perspective is best viewed as an agency issue. It is difficult to envisage how existing regulation of gaming could effectively address this problem in a sensible way. The problem of abuse within families is not primarily related to problems arising from gaming, nor is it solved simply by gaming regulation. General solutions directed at the wider problem are necessary.

The Department is correct in concluding that the promotion of employment, tourism and economic development, which is one purpose of the Casino Control Act 1990, is an inappropriate ground for government intervention. The main reason for this, however, centres on the efficiency with which resources are used rather than the question of fairness among industries.

The grounds for industry-specific intervention in gaming are weak. The heavy regulation of gaming reflects moral and paternalistic views. Most New Zealanders demonstrate by their spending decisions that they believe gaming is an acceptable activity. The risks of crime in a more open and transparent environment are overstated. The welfare of consumers would be advanced by bringing the regulatory regime for gaming into line with that applicable to most other activities.

The welfare of consumers would be advanced by bringing the regulatory regime for gaming into line with that applicable to most other activities.

Substantial investments have recently been made under the existing regime. The above changes would therefore adversely affect some private sector suppliers. Statutory protections that have a time limit should generally be honoured, and private firms should be given an opportunity to adjust. It is important, however, that future arrangements are clearly signalled so that they can be taken into account in investment decisions.

The two casinos are the only gaming activities that are permitted to be operated for commercial gain. Racing industry profits are required to be applied for the furtherance of that industry. The NZLC is also permitted to pay its distributors. Licensed promoters who operate gaming for community purposes may also be paid but their rate of compensation is limited. Besides these provisions, the net proceeds from gaming are required to be applied for community purposes.

There are few industry-specific restrictions on the advertising of gaming. The Casino Control Authority has reserved the right to require the tone of advertising by casino operators to be changed if it is considered to be in bad taste. The Department states that the advertising of gaming machines would not be considered a legitimate operating expense, but it does not explain its reason. It notes that one objective of regulating gaming would be to ensure that operators abide by any specific requirements relating (among other things) to the level of advertising. These issues raise the general question of whether there are valid grounds to control the advertising of gaming activities.

The above reasons suggest that a sceptical view should be taken of industry-specific restrictions on advertising. The same view applies to any self-regulation that is motivated in large part by the desire to avoid statutory regulation. The evidence indicates that such restrictions harm consumers. Controls on advertising restrict the availability of gaming and do not address abuse. They cannot be justified on economic grounds and should be excluded from any regime for gaming.

The present minimum ages for gaming range from 16 for Instant Kiwi, 18 for betting on horse and greyhound races, and 20 for entry into a casino. The question of whether there should be restrictions on the age at which people may engage in gaming and, if so, the broad nature of such limits, needs to be examined. The Department raises this issue but does not discuss the principles involved or put forward a proposal.

An economic approach to these questions starts from the proposition that, unless special factors apply, gaming should be treated like most other goods and services for regulatory and taxation purposes. Its consumption is a matter for individual choice and responsibility. The next step is to examine whether there are valid grounds for specific government intervention. The costs and benefits of any intervention would then need to be assessed.

Society accepts that individuals generally make rational choices - not in the sense that they do not make mistakes but that they do not systematically repeat them and act against their interests. Except for a few products that are prohibited from sale or distribution, such as illicit drugs, or those that are sold subject to special conditions like firearms, traders are entitled to supply goods and services, and adults of sound mind are able to choose whether to buy them.

Young people, because of their immaturity and limited experience and knowledge, may not always be able to make rational and informed decisions. This, for example, is the economic rationale for limits on the capacity of minors to enter into enforceable contracts. Under the Minors' Contracts Act 1969, contracts, except those of life insurance or of service, made by persons under the age of 18 years are prima facie not enforceable against the minor. In the absence of a minimum age for gaming, providers are likely to exercise care in deciding whether to supply young people, especially in relation to the supply of credit, as such a contract would be unenforceable against a minor.

Parents (and other people who act in their place such as guardians) can be expected to oversee the decisions of their children. Parents are generally assumed to act in the best interests of young people because they have stronger incentives to do so than any other person or agency. For this reason, the rights of parents to act for children should generally be upheld and interventions should be restricted to clear cases of negligent or abusive behaviour.

The prime responsibility for overseeing gaming by young people rests with their parents. On this basis the supply of gaming services to children would be not be prohibited where the relevant parent (or guardian) explicitly authorised his or her child's actions (for example, when the parent is present). This approach would imply a reduction in the restrictions that apply at present. A person under 16 years of age that is accompanied by an adult cannot lawfully buy Instant Kiwi. The suggested approach would, for instance, imply that there should not be a general age limit on participation in gaming by children who are with a parent.

Parents are unlikely to face greater costs in constraining participation in gaming by young people who are under their care and in monitoring their behaviour in this regard than in respect of most other activities. In relation to gaming, the consequences of children acting in a way that is inconsistent with the wishes of their parents do not seem to be particularly costly. Unlike the consumption of tobacco and liquor, there is no direct risk to their health or accidental injuries to third parties, respectively, with gaming.

If parents faced excessive costs in constraining the activities of children, government regulation of the minimum age for gaming may be justified. It would be necessary for the government to satisfy itself that the benefits of bringing young people's pattern of gaming closer to that approved by their parents outweigh the costs involved. The latter include administration and compliance costs, and interference with the freedom of those parents whose preferences would be unable to be met.

If this approach were adopted, a minimum age at which the consent of parents would not be required to participate in gaming would need to be set. This relates to the age at which young people are generally considered to be sufficiently mature to judge their long-term welfare and the willingness of the community to enforce a particular age limit. For a range of activity, the former is generally between 16 years (for a full driver's licence and to appear before the District Court) and 18 years (for the right to make a will, to enter into an enforceable credit contract without parental consent, to obtain a firearm's licence, to vote in a general election, to undertake jury service, to serve in the defence forces and to go to war). While 16 years is the minimum age at which a person can be married, people under the age of 20 generally require their parent's consent. The school leaving age is to be set at 17 years. The present minimum drinking age is generally 20 years, but in some circumstances it is 18 years.

There seems little justification for a higher minimum age for casinos than for other forms of gaming. The minimum age for entry into a casino in Queensland is 18 years.

Nor did the Department discuss the level of funding that is appropriate and equitable. The efficiency of related spending should also be examined critically before any commitment is made to continue tied taxes. This aspect is not examined further.

The TAB and operators of gaming machines are subject to gaming duty at the rate of 20 percent of gross profit. The NZLC and casino operators pay 5.5 and 4.0 percent respectively of their turnover. Gaming duty is expected to yield about $126 million in 1996/97.

The net profits from gaming machines and lotteries are required to be distributed for community purposes. The profits from the TAB are required to be applied for the advancement of the racing industry. Casino operators have been expected to contribute funds to community purposes over and above the 4 percent duty they pay, and it is understood that the TAB has similarly made voluntary contributions.

A possible argument for imposing industry-specific taxes is to fund related health costs. The costs of subsidised health services that are provided in response to gaming-induced illnesses fall on taxpayers rather than the people concerned. The policy of not charging users for the full cost of health services reduces the incentive for people to adopt healthy lifestyles (for example, to exercise and to eat a balanced diet) and encourages them to engage in risky pursuits. This problem relates to many activities (for example, risky non-professional sports and recreational activities, such as aviation sports, rugby football, motor racing, mountaineering and diving, as well as to illegal activities such as participation in crimes).

The financing of most health services through the tax system means that the health costs incurred by participants in gaming result in higher taxes on other taxpayers. The best solution to this problem is to charge most users for the health services which they consume (with a commensurate reduction in taxation and an increase in private insurance arrangements). The funding of certain health costs through the Accident Rehabilitation and Compensation Insurance Corporation is a tentative step in this direction. There would be equity grounds for the government to provide a modest level of services on a targeted basis or to require compulsory insurance at a prescribed minimum level (if the free-rider problem would otherwise be excessive). This would substantially shift the costs of health care to individuals and thereby encourage them to make optimal decisions on the consumption of gaming and on other matters which affect their need for health services. Taxes impose deadweight costs (output losses) whereas appropriate user charges do not. This arises because all practical taxes alter the choices facing taxpayers. An income tax, for example, discourages work, saving and investment.

If the government chooses to provide subsidised health care for equity reasons, the adverse efficiency implications of that decision are unlikely to be lessened by applying specific taxes to gaming. It is more likely that moral rather than economic arguments account for industry-specific taxes on gambling.

A further question is whether gambling is an appropriate tax base for general revenue purposes. Moralistic and paternalistic arguments have been advanced for discouraging gambling by imposing taxes. Any moral or religious objections to gaming are not overcome by applying part of the proceeds to causes that are deemed to be worthy. The ends do not justify the means.

Recent tax reforms have removed or reduced the most distortionary taxes. Gaming duty and compulsory funding of community activities from gaming have not been addressed. GST and income tax (where gaming is undertaken for profit) alone should apply to gaming.

Tied funding of public activities is generally undesirable because such expenditure is not subject to appropriate scrutiny and is not evaluated against competing claims. If resources are committed to activities that yield a lower return to the community than could be obtained elsewhere in the public sector or in the private sector, community welfare is reduced.

This criticism is particularly relevant to spending funded from gambling. There appears to be limited opportunity for a regular first principles review of the $190 million that is distributed for community activities under the Gaming and Lotteries Act 1977. The Department reports that little information is available on the disposition of the proceeds from gaming machines. It is uncertain whether all funds are transferred to genuine charities, and some charities benefit people on high incomes. There are grounds for questioning the social benefits of such expenditure.

Furthermore, the analysis presented below suggests that the existing lottery system channels large sums to administrators and Crown entities rather than the community groups which are the intended beneficiaries.

The NZLC's operating costs amounted to 14.6 percent of sales in 1995/96 (see table 1). The allocation of costs among categories appears to have been fairly constant over recent years. The TAB has a similar sized network, larger turnover and a more complex product range than the NZLC. The TAB's operating costs were 7.7 percent in 1994/95. (This percentage has been fairly constant in recent years.) If the TAB's operating costs are adjusted to encompass the same proportion of expenditure on advertising as the NZLC (which may not be efficient), they rise to 9.3 percent of sales, which is still well below that of the NZLC.

A further indication that the NZLC is a high cost operator is provided by overseas experience. Many overseas lotteries (including the United Kingdom's massive new lottery) are operated by private firms. It is understood that they typically charge about 4 percent of turnover. Although their costs may not be comparable with those of the NZLC, there seems to be scope for substantial efficiency gains. These can best be realised by permitting private operators to provide lotteries. New technology is likely to facilitate competition, particularly for lotteries. Continuing inefficiencies by the NZLC will lead to a loss of business to overseas suppliers.

Given these factors, and technological advances, it is hard to see why the LGB's functions should cost more than they did in 1989/90 – at 1.4 percent of income or almost $5 million less than they cost in 1996.

The LGB also has a tendency to award funds to large organisations or Crown entities. In 1994/95 some $7 million (5.6 percent) of its allocations went to Lottery Health and Science Research Committees which awarded funds almost entirely to universities, CRIs and other Crown entities. The minister of internal affairs's discretionary fund made the majority of its grants to the National Museum. The projects concerned may be worthy, but such allocations do not appear to reflect the reported goal of the LGB which is "to support and encourage self reliance in New Zealand communities".

In 1994/95 the government provided over $280 million (for 1996/97 over $300m) for public good science and technology through Vote: Research, Science and Technology. It is difficult to envisage the need for a top-up through the LGB. The LGB committees are unlikely to be better equipped to assess public good projects than the Foundation for Research, Science and Technology.

The three bodies that are bulk funded by the LGB also impose high costs on the distribution process. The Hillary Commission received some 32 percent of its income from the LGB in 1995. Its corporate services cost some 7.4 percent of income in 1995 –

a considerable reduction on the early 1990s (such costs peaked at 16.7 percent in 1990), but apparently high for a body whose main function is to act as a conduit for funds. Creative New Zealand received some 82 percent of its funds from the LGB in 1996. Its operating costs amounted to a remarkable 21.7 percent of such funding. (An examination of its accounts suggests that this is a reduction from the equivalent of 24 to 25 percent in 1993 and 1994.) The NZFC received some 59 percent of its funds from the LGB in 1995. Its operating costs were 8.8 percent, an increase from the 5 to 7 percent recorded in the early 1990s, though there has been some reallocation of expenses, and the NZFC has engaged in the marketing of New Zealand films overseas (from which it has gained significant income).

The allocation of large amounts through the LGB to the bulk-funded bodies means that the accountability of those organisations is weak. The government appears to have less influence in the areas concerned (cultural affairs and sport) than might be expected given the level of funding provided to these organisations. In 1994/95 grants from Vote: Cultural Affairs for the promotion and support of the arts were only 21 percent of the size of LGB grants to Creative New Zealand, and grants for the promotion and support of New Zealand films were 12.8 percent of LGB grants to the NZFC. Grants from Vote: Sport, Fitness and Leisure to the Hillary Commission and other bodies were only 2.3 percent of LGB grants to the Hillary Commission.

Overall, the distribution of lotteries funding appears to be characterised by excessive administration costs and possible mis-direction to non-community based groups. Some $16m of additional funds annually (about a 14 percent increase) could be made available to the community if these issues were addressed.

The LGB model is an extremely poor one. Funding of community organisations should be through the relevant Votes to ensure accountability both in respect of those organisations and of the government departments charged with policy in the relevant areas.

Any allocation of funds to community bodies should be decided through the budgetary process or bodies that are accountable to the community. Unaccountable monopolies are to be avoided. Funding should be restricted to genuine community bodies and not central Crown entities.

The high administration costs of the LGB and the bulk-funded bodies, and the direction of funds to large or Crown entities, mean that community-based bodies receive less than half the after-tax funds available from lotteries (see table 3). This is undesirable.

The key question that arises is whether government entities should continue to supply gaming services. The Department did not examine this issue on a first principles basis. Its paper assumes that the government may wish to operate gaming to raise funds for community purposes and notes that, in this event, there should be a segregation of the government's roles as regulator, operator and distributor of funds.

The thrust of the proposal that there should be a single comprehensive policy framework for the gaming industry is supported by this submission, provided that it is not intended to apply a uniform approach to all forms of gaming without taking into account costs and benefits. It would, for example, be inappropriate to license modest raffles if it were decided that casinos should be licensed to address the risk from organised crime.

The overarching principle should be the promotion of community welfare, and it follows that the key criterion for judging policy options should be the efficiency with which economic resources are used by the industry. This criterion is largely absent from the Department's paper. While neutrality of treatment is desirable in many instances it is not an overriding principle. The promotion of efficiency would, for example, require closely substitutable forms of gaming to be treated on a neutral basis, but it would not necessarily justify the same treatment for other gaming activities. The Department appears to place too much weight on neutrality rather than on an appropriate assessment of the costs and benefits of particular proposals.

Subject to these observations, the principles of consistency, predictability, transparency and least cost intervention are appropriate. We doubt the relevance of the Treaty of Waitangi in this context.

The economic impact study attempts to compare the merits of different regulatory regimes for gaming. However, as the authors note, a comparative static approach is taken. This fails to capture dynamic and other efficiency effects of different regulatory regimes. Most of the issues raised above were omitted from the study.

The Department suggests that there should be an integrated national distribution regime designed in consultation with interested parties. This is predicated on the view that gaming should be taxed to fund a wide range of community activities. For the reasons discussed above the NZBR does not agree with that view.

The Department's proposal appears to constitute an enlargement of the LGB's functions and associated distribution mechanisms. As discussed, a centralised system, operating outside the government's budget process and financial management system, would lead to poor accountability and invite inefficiency and lobbying. The existing lottery system demonstrates these risks, and channels large sums to administrators and to Crown entities rather than to community groups, which are the intended beneficiaries.

These proposals are based on the Department's view that the government should intervene to ensure fairness to participants and to prevent fraud and crime. We argue that less restrictive entry requirements would better promote the interests of the consumer. As discussed above, the arguments advanced by the Department do not justify the licensing of gaming operators. At most, some limited restrictions on the right to supply gaming services may be justified but these would not require licensing. Moreover, the risks of crime are not the same for all forms of gaming. The application of a uniform test does not take account of relative costs and benefits. Resources committed to vetting applications to operate small-scale housie evenings and raffles would be more profitably employed elsewhere.

The Department has not put forward specific policy proposals in this area. Its conclusion that generic regulatory frameworks, such as the Fair Trading Act 1986, should be relied upon to the maximum extent possible is endorsed. On the other hand, it appears that the Department has not ruled out regulating the time of play, the location of gaming operations, the level of prizes and the provision of credit. These matters are controlled at present.

The grounds for industry-specific controls along such lines are dubious. Restrictions on trading days and hours of gaming are aimed at limiting the supply of gaming rather than at problem gambling. This approach has been rejected in relation to the sale of liquor. The level of prizes should be set by gaming suppliers who will respond to competition. The provision of credit should also be a matter for suppliers. It is implausible to believe that a prohibition on the supply of credit by gaming operators would produce significant benefits. Alternative sources of credit are readily available to creditworthy people.

The broad thrust of the Department's proposals is supported by this submission. Where feasible, the cost of regulation should be borne by the relevant beneficiaries. This proposition generally implies user charges. However, the cost of unjustified regulation should not be imposed on the gaming industry and inefficient government agencies should not be able to pass on their costs. Where feasible, regulatory activities should be contracted out to enhance efficiency.

The view that gaming should be subject to the same taxation regimes that apply to other industries is endorsed. As discussed above, we do not believe that industry-specific taxes could be justified on valid public policy grounds. Gaming duty and compulsory community contributions constitute such taxes.

It suggests that the government may also wish to operate gaming to raise funds for community purposes.

The determination of policy and the establishment and enforcement of a regulatory framework are normal governmental functions. The extent to which research needs to be undertaken (aside from funding from the public good science pool and other sources) and information generated and provided to the public would be substantially reduced if the proposals contained in this submission are adopted. Competitive markets are a powerful mechanism for the discovery and dissemination of information.

The Department did not critically review whether the government should engage in the provision of gaming. As noted above, a valid case could not be made for this role.

The thrust of this submission is that the regulatory framework for the supply and consumption of gaming should be brought into conformity with that of other products, except where there are valid public policy grounds for industry-specific interventions. Many other products and activities involve risks and the possibility of misuse, yet they are not subject to anything like the degree of control and punitive taxation as gaming.

People derive substantial benefits from gambling. The vast majority of participants act responsibly. Present regulations aim to control the supply of gaming. This approach was rejected by the Laking working party in respect of liquor, where there is a much higher risk of injury to innocent parties. Most costs arising from the misuse of gaming are borne by the gambler and his or her household. Policies that target the misuse of gaming rather than responsible consumption are required to address social concerns. These are matters for the industry as well as the government. The risks of criminal activity, in a more open and competitive market, are overstated in the Department's paper.

This submission is made on behalf of the New Zealand Business Roundtable (NZBR), an organisation of chief executives of major New Zealand business firms. The purpose of the organisation is to contribute to the development of sound public policies which reflect overall New Zealand interests. Of particular relevance to the present submission is its view that consumer interests should be paramount in policy design.

Liquor has been consumed for thousands of years. Over 70 percent of women and 80 percent of men are reported to be drinkers (ALAC 1996). Beer, wine and spirits provide substantial benefits for those who choose to consume them. This is best shown by their willingness to buy liquor. Statistics New Zealand reports that on average households spent $17.60 a week, or 2.6 percent of their weekly expenditure, on liquor in 1995/96. This is broadly comparable to the amount spent on each of the following categories of food: meat, poultry and fish ($17.10), fruit and vegetables ($16.90) and cereals ($14.80).

A contemporary view of the health benefits and risks associated with liquor is provided by the American Council on Science and Health (ACSH). ACSH is an independent consumer education and public health institution that is directed and advised by prominent American physicians and scientists.

Scragg (1995), in the first serious New Zealand study aimed at estimating the proportion of deaths caused or prevented by drinking, reported a net saving in lives of 416 (equal to 1.5 percent of all deaths) in 1987. This study presents a totally different picture from the 700-800 lives lost annually that is commonly cited. Taking account of the age of people whose lives were saved or lost, Scragg concluded that a total of 9,525 person-years of life were lost. This result reflects the finding that young people tend to lose their lives mainly through accidents, whereas middle-aged and older people with a shorter life expectancy tend to have their lives extended.

Although the balance of professional opinion has shifted since 1982, some groups continue to argue that the consumption of liquor reduces community welfare. The Ministry of Health, for instance, released an issues paper in 1995 on a national policy on drugs which claimed that the "economic costs of alcohol" amounted to $1,500 million (Ministry of Health 1995). The Ministry did not acknowledge compelling criticisms of an Australian report on which the estimate was based. Devlin et al. (1996) suggests that the "social cost of alcohol abuse" was between $1.5 and $2.4 billion in 1991. This estimate omitted any benefits from the consumption of liquor despite an acknowledgment by Devlin et al. that they are generally recognised in the literature. Their finding is included in the Alcohol Advisory Council of New Zealand's (ALAC) 1996 Fact Pact without qualification (ALAC 1996).

Such studies are seriously flawed as a basis for public policy making. The broad issue for public policy is not the level of gross or even net social costs but whether people bear the economic costs of their consumption decisions (that is, that all costs which are external to the consumer are imposed on the consumer where it is efficient to do so). In the case of young people, the principal issue is whether they are sufficiently mature to take decisions that advance their welfare. Neither the studies cited by the Ministry of Health (1995) nor that by Devlin et al. (1996) address these issues.

The vast majority of consumers of liquor act responsibly. Only a very small percentage of people engage in anti-social behaviour. Policies that target the misuse of liquor rather than responsible consumption are required to address anti-social behaviour. This approach is similar to that taken in respect of motor vehicle accidents. Greater mobility is rightly seen as a benefit of higher living standards, and strategies to reduce accidents are targeted at their specific causes. The problem does not relate to people who drive, or even to those who drive a lot, but to those who cause accidents. A similar approach in respect of liquor requires policies directly targeted at its misuse.

Some of the least desirable drinking habits were encouraged by inappropriate licensing and other restrictions, such as the construction of large on-licence establishments that were commonly referred to as booze barns and 6 o'clock closing. The relaxation of controls introduced by the Sale of Liquor Act 1989 (the Act) has contributed to a more mature and responsible approach to drinking. The volume of per capita consumption of liquor has declined despite a large increase in the number of outlets. This outcome contradicts the prediction of those who claimed that the greater availability of liquor would lead to increased consumption. Moreover, there has been a fall in the rate of fatal accidents that are reported to be alcohol-related.

Since 1984 successive governments have placed greater focus on their core role of setting the framework which enables individuals and firms to interact in ways that maximise community welfare. The supply of goods and services has increasingly been viewed as the function of private enterprise, except in certain exceptional circumstances. Competition has correctly been seen as the key to encouraging producers and distributors to satisfy consumer preferences at the lowest possible cost. The vast majority of New Zealanders endorsed these broad policy directions at the recent general election. The review of the Act provides an opportunity to apply them more consistently to the distribution of liquor.

The supply and consumption of liquor are heavily regulated. The minimum drinking age is controlled, suppliers are licensed, managers are required to be certified, trading hours and days and liquor advertising are subject to industry-specific rules, and public enterprises – licensing trusts – are protected from competition. Liquor is subject to substantial excise taxes. These provisions extend well beyond those applicable to most other products. They impair competition and lead to higher prices and lower quality service than otherwise, waste resources from a community perspective and inhibit innovation.

The thrust of this submission is that the regulatory framework for the supply and consumption of liquor should be brought into conformity with that for other products, except where there are valid public policy grounds for industry-specific interventions. Many other products or activities – food, transport equipment, sport and recreational activities and so forth – involve risks and the possibility of abuse, yet are not subject to anything like the degree of control and punitive taxation as liquor. While there are grounds for some restrictions on the minimum drinking age, virtually all other industry-specific regulations cannot be justified on accepted public policy criteria.

The Laking working party recommended a significant liberalisation of our liquor laws. However, it did not go far enough in dismantling the heavy-handed and paternalistic regulation that distinguishes the distribution of liquor from that of other products. Moreover, its proposals were not adopted fully.

The above measures would enable the Act to be repealed with residual matters, such the drinking age, included in the Crimes Act 1961. The efficiency of the distribution of liquor would increase substantially, thereby conferring benefits on responsible drinkers and the wider community through a more efficient use of resources.

This submission addresses all issues listed in the Ministry of Justice's discussion paper, Liquor Review 1996, except the definition of intoxication and technical issues.

The balance of this submission is presented in 7 sections. The next section (section 2) addresses the minimum drinking age, including the issue of identification cards. The regulation of traders is examined in section 3. The question of whether particular classes of business should be licensed to supply liquor and whether trading hours and days should be restricted is also discussed. Section 4 focuses on licensing trusts. Sections 5 and 6 address liquor advertising and promotion, and health warnings respectively. Excise taxes are discussed in section 7. Conclusions and recommendations are presented in section 8.

The establishment of a minimum drinking age or ages is arguably the most important issue in the regulation of liquor. If the supply of liquor to young people were not prohibited, the justification for industry-specific regulation of the distribution of liquor would vanish.

An economic approach to the question of whether there should be restrictions on the drinking age and, if so, the broad nature of such limits starts from the proposition that, unless special factors apply, liquor should be treated like most other goods and services for regulatory and taxation purposes. Its consumption should be a matter for individual choice and responsibility. The next step is to examine whether there are valid grounds for specific government intervention. The costs and benefits of any intervention would then need to be assessed.

Society generally accepts that individuals can make rational choices – not in the sense that they do not make mistakes, but that they do not systematically act against their interests. Aside from a few products that are prohibited from sale or distribution, such as illicit drugs, or those that are sold subject to special conditions, like firearms, traders are entitled to supply goods and services, and adults of sound mind are able to choose whether to buy them.

Young people, because of their immaturity, limited experience and knowledge, may not be able to make decisions which are likely to maximise their welfare. This, for example, is the economic rationale for limits on the capacity of minors to enter into enforceable contracts. However, parents (and other people who act in their place, such as guardians) can be expected to oversee the decisions of their children. Parents are generally assumed to act in the best interests of young people because they have stronger incentives to do so than any other person or agency (Becker 1991). For this reason, the rights of parents to act for children should generally be upheld and interventions restricted to clear cases of negligent or abusive behaviour.

The prime responsibility for overseeing the purchase and consumption of liquor by young people should rest with their parents. On this basis the supply of liquor to children would be prohibited where the relevant parent (or guardian) did not explicitly authorise their child's actions (for example, when the parent is not present). This approach would imply an extension of the exemptions that apply at present. It would, for instance, suggest that there should be no age limit on the consumption of liquor by children who are with a parent, just as the present law does not attempt to regulate the consumption of liquor by young people in their homes. Most liquor is consumed off-premises.

The discussion to this point is predicated on the presumption that parents are capable of making informed decisions. The supply of liquor to people under the minimum age should not be able to be authorised by a parent who is intoxicated.

Parents may face excessive costs in constraining the purchase and consumption of liquor by young people who are under their care and in monitoring their behaviour in this regard. Government regulation may enable such costs to be reduced. It may also be necessary to consider ways in which suppliers might better ascertain whether parents wish their children to consume liquor. The issue of identifying parents and guardians might be troublesome. On these grounds it may be efficient to impose some additional constraints on the supply of liquor to young people. It would be necessary for society to judge that the benefits, in terms of bringing young people's pattern of liquor purchase and consumption closer to that approved by their parents, outweigh the costs involved. The latter include administration and compliance costs, and interference with the freedom of those parents whose preferences would be unable to be satisfied.

A related issue is the minimum age at which the consent of parents would not be required to buy or consume liquor. This relates to the age at which young people are generally considered to be sufficiently mature to judge their long-term welfare and the willingness of the community to enforce a particular age limit. For a range of activity, the former is generally between 16 years (for a full driver's licence and to appear before the District Court) and 18 years (for the right to make a will, enter into an enforceable credit contract without parental consent, obtain a firearm's licence, vote in a general election, undertake jury service, serve in the defence forces and go to war). While 16 years is the minimum age at which a person can be married, people under the age of 20 generally require their parent's consent. The school leaving age is to be set at 17 years. By contrast the present minimum drinking age is generally 20 years, but in some circumstances it is 18 years.

The apparent widespread breach of the present law suggests that it is not supported by a large section of the community. According to research summarised by the Alcohol and Public Health Research Unit (1996), men and women between the ages of 18 and 19 have the second highest mean level of alcohol consumption for all age groups of men and women respectively. Only 20–24 year olds recorded a higher mean consumption than 18–19 year olds. Moreover, nearly a third of 14–19 year olds surveyed claimed to have consumed liquor in hotels in the previous year, and some 38 percent claimed to have bought liquor for off-premise consumption. These findings suggest that any attempt to constrain the supply of alcohol to at least 18 and 19 year olds is doomed to fail, unless there is a substantial change in community attitudes to liquor consumption by young people. This seems unlikely.

There are some exceptions to the above summary. Several countries have no limit (France and Spain, and two provinces of Canada) or a lower limit (Luxembourg and New Zealand) where a person who would otherwise be under age is accompanied by an adult, parent or guardian, or when dining (New Zealand and the United Kingdom). Belgium prohibits anyone under 16 entering a dance hall where fermented beverages are served, or other licensed establishments where there is dancing, unless the person is accompanied by a parent or guardian. Denmark has no age limit for the off-premise purchase of liquor. In one or two countries a slightly higher age limit applies where spirits are consumed.

Parliament did not accept the Laking working party's recommendation that the minimum drinking age be reduced to 18 years. It set 20 years as the minimum drinking age in most cases and introduced a range of age limits which apply depending on the designation of the premises and the circumstances.

There is also the need to contain pressures for exceptions. Too many exceptions would make the suggested approach difficult to apply.

The introduction of compulsory identification cards to provide proof of a person's age solely or mainly for the purposes of enforcing liquor laws could not possibly be justified. The costs of coercion together with administrative and compliance costs could be expected to far exceed the benefits.

Any proposal to introduce a national identification system for other purposes, such as traffic enforcement or to further the administration of tax and income support systems, would raise significant civil liberty issues. It would need to be carefully considered and is beyond the scope of the Advisory Committee.

The Laking working party's approach, which emphasises the right of traders to refuse service where there is any doubt about a person's legal right to buy or consume liquor, together with voluntary identification arrangements, are sufficient. The efficacy of that approach would be enhanced if the minimum age is lowered to a level which is supported by the community.

The discussion paper examines whether supermarkets and grocery stores should be permitted to sell beer and spirits. They are presently able to sell wine other than in a dry or trust area. The discussion paper is insufficiently searching in its review. The Advisory Committee should examine whether suppliers of liquor should continue to be licensed.

Parliament did not fully accept these recommendations. It prohibited dairies from selling liquor and it limited supermarkets to selling wine (and low strength beer which is not defined as liquor for the purposes of the Act). Parliament agreed that service stations should not be permitted to sell liquor.

The Liquor Licensing Authority (LLA) noted that there is no clear distinction among a grocery, superette and a dairy. As a consequence, it has been asked to make what it terms "some peculiar decisions." In the LLA's view, the relevant section of the Act needs to be reviewed because of this and other drafting difficulties.

The Laking working party's view that service stations should be prohibited from selling liquor is questionable. It is, for example, legitimate to drive to a licensed outlet or for an outlet to be located near a service station. In one decision of the LLA, an off-licence was granted to a business which was renting the former lubrication bay of a service station because the premises were next to and not part of the service station.

While drinking and driving is a serious problem, it affects a minority of the population. A restriction on liquor sales by service stations seems to be an inefficient method of addressing the drink-drive problem. No one would seriously suggest that service stations should be prohibited from selling matches and cigarettes because their misuse in the presence of petrol could have tragic consequences.

A survey of 23 countries by the Brewers Association of Canada (1993) shows that the supply of liquor to consumers is generally licensed. There are, however, some exceptions, particularly in relation to the supply of liquor for off-premise consumption. The degree of restriction imposed by licensing varies. The extent to which licensing requirements are enforced is not known.

Sellers of liquor for both on- and off-premise consumption are not licensed in Spain. Off-premise sales are not subject to industry-specific licensing in Austria, Denmark, Germany and Portugal. It is said that a person can buy beer in Germany for off-premise consumption anywhere he or she can purchase milk. In Japan and Portugal, restaurants and bars are not required to obtain a special licence to sell liquor. In the Netherlands, beer and wine may be sold for off-premise consumption from any stores that are licensed to sell food. In Luxembourg beer can be sold in unlicensed premises that sell food such as restaurants and snack bars.

The discussion paper argues that one reason for permitting the sale of wine by supermarkets and grocery stores is that it is considered to be an adjunct to food, and it is therefore appropriate that people should be able to buy it at the same time as they purchase food. This argument has connotations of a centrally planned distribution system. The essential argument for allowing firms to sell liquor is to encourage competition, thereby encouraging them to satisfy consumer preferences at the lowest possible cost.

The main contemporary rationale for licensing is to further the enforcement of the prohibition on sales to under-age and intoxicated drinkers. This cannot possibly require the present heavy-handed and costly regulation of the supply of liquor.

The Act reflects the view that the availability of liquor should be controlled to reduce abuse and that particular classes of firms such as hotels, taverns, clubs and off-licences should be subject to different regulatory requirements. The outcome is a reduction in competition leading to higher distribution costs and lower quality services. Moreover, large deadweight costs, arising from a substantial licensing apparatus, are imposed on the community. One of the major costs of licensing is the delay involved. According to industry sources it takes around six months to obtain an on-licence.

Open competition among firms offers the best opportunity to satisfy consumers' preferences at the lowest possible cost. For this reason, the sale of liquor should not be restricted to particular classes of firms such as bottle stores, supermarkets, hotels, taverns, clubs and licensed restaurants. The price differences among fully licensed, BYO (bring-your-own) and unlicensed restaurants reflect impaired competition and the direct costs of the licensing system as well as perceived differences in the quality of service. This is an efficiency rather than a fairness argument, as the discussion paper suggests. In our view liquor licensing should be abolished.

There may be grounds for identifying premises or businesses which are engaged in the supply of liquor, if this is necessary to enforce the minimum dinking age and a prohibition on sales to intoxicated people. These grounds are, however, unlikely to be sufficient to justify detailed registration procedures or licensing. Restrictions on the sale of books and similar publications to people under certain ages do not, for example, require the licensing of booksellers.

The present requirement for reports from health and fire safety perspectives duplicate separate regulatory provisions. The distinctions among restricted, supervised and undesignated areas in licensed premises reflect the view that young people should not be present in certain areas such as public bars, but should be able to use licensed dining rooms and conveyances such as aircraft and trains. They complicate the present rules, are poorly understood by the public and impede enforcement. Such distinctions are unnecessary. Similarly, it is not immediately obvious why laws relating to the closure of licensed premises in the case of serious disorder (riot) ought not to apply regardless of the nature of the activities that are taking place (for example, the consumption of liquor, demonstrations, sporting events and rock concerts).

The economic grounds for requiring managers of on-licensed premises to be suitable persons relates to the enforcement of hours of trading and age limits. Licensed managers who persistently break such rules may be unable to renew their licences. On the first point, it is proposed below that the hours of sale be deregulated. The age limit would be less of a problem if rules that are broadly supported by the community were put in place.

If it is necessary to identify the person responsible for the sale of liquor to facilitate enforcement, firms that sell liquor might be required to display the name of the duty manager as at present. There is little justification, however, for certification requirements and insufficient grounds to require managers to complete New Zealand Qualifications Authority or other recognised training as suggested in the discussion paper.

There have been suggestions that a minimum age should be set for all staff who sell liquor to the public. The responsibility for compliance with the law should rest, in the first instance, with business owners and managers. They appoint staff and arrange for their training. No person under the school leaving age (soon to be 17 years) would normally sell liquor without supervision by a manager or owner. Staff also have a responsibility to comply with the law. This applies in respect of liquor, cigarettes and restricted publications and videos, and to the general law such as food regulations. Age limits have not been imposed for these comparable activities. They would impose considerable costs initially on traders, such as restaurants and supermarkets, and ultimately on consumers.

The appropriate penalty for selling to under-age or intoxicated persons should generally be a fine rather than a prohibition on a person's means of livelihood. (There may be grounds for reviewing the level of penalties.) Provision could be made to prohibit a person who habitually sells liquor to under-age drinkers or intoxicated persons from selling liquor, but this would not necessarily require all managers to be certified. Some people are prohibited from becoming a director of a company but this does not require all other directors to be certified.

Any provisions along the above lines should be included in the Crimes Act 1961. There is no need to retain the Sale of Liquor Act 1989. The district licensing agencies and the LLA should be abolished with a significant saving in administration and compliance costs. The LLA alone expects to determine 7,200 applications in 1996/97.

The Department's discussion paper notes that there are concerns with the differential treatment of particular classes of licence holders, and there are problems with what is meant by the expression "for the purposes of dining". It notes that all licence holders could be permitted to trade on Sundays or no licence holders could be permitted to trade on Sundays. These are not the only options that should be considered. The Advisory Committee should examine seriously why there should be any special regulation of trading hours or days in respect of liquor.

The Laking working party concluded that the abandonment of any legislative provision imposing minimum or maximum hours for hotels and taverns would have little, if any, impact on the time that they are open for business, or on consumption. As a consequence, it did not propose to prescribe the days or hours of trade for on-licences, off-licences or club licences. However, the hours of trade were included as a criterion for the issue of such licences and provision was made for the LLA to specify such hours in granting licences. The basis on which the LLA was to decide applications was not stated.

Parliament did not accept fully the Laking working party's recommendations. It decided that trading on Sundays, Good Friday and Christmas day should be prohibited as a condition of all on-licences, off-licences and club licences. Exceptions were provided for lodgers and employees of the licensee and for any person who was present on the premises for the purposes of dining. For those entities which had been permitted to trade on a Sunday (for example, clubs), this represented a tightening of the rules.

In 1991 the sale on Sundays of grape wine or fruit wine made on the premises, pursuant to a licence issued under the Wine Makers Act 1981, was authorised.

Since 1 August 1990, most shops have been free to trade 24 hours a day except for Christmas day, Good Friday and Easter Sunday, and up to 1 pm on Anzac day. The ban on Sunday trading in liquor is more restrictive than that applying to most businesses.

The LLA reported that 24-hour trading has generally been accepted without any great public outcry or the creation of additional problems for the police.

The LLA has generally set 11 pm as the latest hour for trade by off-licence holders. One authority has noted that the LLA does not have the power to adopt this stance and that it is inconsistent with the Laking working party's report (Dormer, Sherriff and Crookston 1990).

The response of consumers and producers to the liberalisation of shop trading hours demonstrates that restrictions on trading hours, even apparently innocuous ones, can impose significant costs. It is also apparent that no government has reliable information on such costs. On the other hand, to the extent that the present procedures tend to be non-constraining, they impose unnecessary compliance and administration costs on the community.

The regulation of trading days and hours cannot be justified on the grounds of controlling sales to under-age people or intoxicated adults. The only plausible rationale, aside from paternalism, is a belief in the discredited availability theory. Issues relating to the location of outlets, noise and nuisance to neighbours are matters that should be addressed under the Resource Management Act 1991 and not under the Sale of Liquor Act 1989. This point applies to the suggestion in the discussion paper that people should be able to object to the issue of an application for a licence on the grounds that the premises are or will be in the immediate vicinity of a place of public worship, a hospital or a school.

The days and hours of supply of liquor for consumption on-premises or off-premises ought to be a matter to be determined by traders (first preference) or made subject to the Shop Trading Hours Repeal Act 1990 (second preference). The establishment of separate rules for selected goods and services, as presently applies to wine in supermarkets, imposes unnecessary costs on traders.

The restrictions on trading days contained in the Shop Trading Hours Repeal Act 1990 are an anachronism which reflect a conflict model of employment relationships and are out of step with the preferences of most consumers. If liquor is brought within that Act, provision would need to be made for a continuation of trading on Anzac morning and for sales on Christmas day, Good Friday and Easter Sunday to diners, lodgers and employees to avoid any unintended tightening in the controls.

Under both options traders would respond to commercial pressures as is the case for dairies and service stations.

The Act provides that a trust may be constituted by Order in Council by the governor-general who acts on the recommendation of the minister of justice. The Minister in turn is required to advise the governor-general on receipt of a written request to form a trust from at least 15 percent of qualified local authority voters in the area. There is also provision for the amalgamation of trusts. A trust may hold a poll of electors on a proposal that the trust give up its exclusive right to hold on-licences, off-licences and club licences in return for the right to carry on any business within its objects outside as well as within its district. Unless such a poll is successfully carried, certain trusts have a monopoly right to hotel or tavern licences, and they are largely protected from competition in respect of other licences. A supermarket in a trust area, for instance, cannot sell wine. These rights are able to be extended to new trusts.

Since the Laking working party's report was finalised, considerable evidence has emerged on the way in which public ownership, particularly when coupled with other impediments to competition, leads to inefficiency. The residual owners of public enterprises have little stake in the firm. They therefore have few incentives to monitor its management. This leads to excessive costs and a divergence between the interests of the owners and those of other stakeholders such as managers. The lack of competition impairs cost control, reduces choice for consumers and impedes innovation. The corporatisation and privatisation process in New Zealand and elsewhere has shown that these costs are often substantial.

The provisions contained in the Act are intended to facilitate the voluntary removal of the preferred status conferred on trusts, consistent with the Laking working party's view that there are no economic grounds for their competitive advantages. Trusts are, however, unlikely to act in this way.

Licensing trusts should be exposed to competition on as neutral a basis as possible. This is consistent with the view that the licensing of liquor outlets should be abolished. Trusts will only survive in a competitive environment if they offer the service demanded by consumers. Provision should be made for their sale. The proceeds could be applied for charitable community purposes in the areas in which the trust operated.

The advertising of liquor through broadcast media is subject to significant controls which are administered by the Advertising Standards Authority (ASA). The ASA is a self-regulatory body which is supported by the industry in large part because statutory regulation would otherwise be imposed. It administers a code of practice and services the Advertising Standards Complaints Board. Broadcasters are required to provide $3 million a year in unpaid time to promote moderate consumption of liquor. These arrangements are uncharacteristic of the general run of commerce.

The thrust of the discussion paper is that present arrangements for advertising and promotion, recently reviewed by a team appointed by the ASA, are satisfactory.

For these reasons we believe a sceptical view should be taken of industry-specific advertising restrictions. The same view is appropriate in respect of self-regulation which is motivated in large part by the desire to avoid statutory regulation. The evidence indicates that such restrictions harm consumers. Controls on advertising focus on restricting liquor consumption rather than addressing abuse. They cannot be justified on economic grounds and should be abolished.

The assumption that consumers are poorly informed on the health risks of liquor underlies the argument for mandatory health warnings on labels and in advertisements. Consumers are said to underestimate such risks, and this leads to excessive consumption of liquor from the community's viewpoint.

The same is true for those consumers who consume more, or less, than a moderate amount of liquor. Furthermore, individual consumers may be willing to bear different amounts of risk. There are no valid grounds for arguing that public policy should be predicated on the view that risk averse behaviour is more efficient or desirable than other aptitudes for risk (Demsetz 1969).

The next question is whether it is valid to assume that consumers are uninformed about the level of health risks associated with the consumption of liquor. Consumers have incentives to acquire information on the risks which they face up to the point where the marginal benefit of acquiring information equals the marginal cost involved in its production and dissemination. Because information is costly to obtain and analyse, research aimed at seeking 'complete' or 'perfect' information would be uneconomic (Demsetz 1969).

Producers also have incentives to provide information on the safety of their products and could be expected to do so if it were beneficial to consumers (for example, where it is cheaper for the producer rather than the consumer to provide the information). Information provided may be of a general nature, such as that conveyed by the reputation of the producer (for instance, by a particular brand). It may also include detailed information on health risks such as that which is available from health professionals (among other sources).

There are also empirical reasons for being sceptical of the view that drinkers systematically underestimate the risks involved. Individuals have generally been found to be informed on most risks that they face. Peltzman (1975) showed that the use of motor car seat belts was consistent with rational maximising behaviour. In an experiment related to the information content of hazard warnings, Viscusi and O'Connor (1987) found that chemical plant workers responded largely as expected to new information on the risks which they faced (that is, their turnover rate increased and they sought higher wages in response to larger risks). Furthermore, Viscusi, Magat and Huber (1987) examined the rationality of consumer valuations of multiple health risks. Their results bore out "many of the most salient predictions of economic theory."

Both theoretical and empirical analyses suggest that the grounds for believing that consumers systematically underestimate the risks to their health from consuming liquor are dubious. The arguments that consumers are poorly informed or are myopic often seem to reflect a paternalistic view (Castle 1986). These findings suggest that the grounds for requiring mandatory health warnings on liquor labels and in advertisements are weak.

The inclusion of a mandatory health warning about the consumption of liquor during pregnancy on all liquor labels would be a cost ineffective means of conveying information to the target population. Similarly, it is implausible that many drinkers are unaware that consumption of liquor may impair their capacity to drive or operate machinery. The suggestion that consumers be warned that liquor can "increase the risk of developing phypertension, liver disease and cancer" is potentially misleading if the protective effects of moderate consumption noted above were not also included.

There may, at most, be a valid case for the government to provide information to the public on the health risks associated with the misuse of liquor on the presumption that consumers are misinformed. The government would in effect subsidise the cost of acquiring information. Any information should be targeted at people who are likely to benefit. The government has programmes along these lines in place.

Liquor, tobacco and certain petroleum fuels are the only products still subject to excise taxes. Excise duties on beer, wine and spirits are forecast to raise $452 million, or 1.4 percent of total tax revenue, in 1996/97. Excise tax accounts for about 20, 30 and 50 percent of the retail price of certain representative beer, wine and spirit products respectively.

There are no economic grounds for levying excise taxes on beer, wine and spirits where the consumer is of sound mind and is capable of making rational decisions, bears the full costs of his or her actions, and is aware of the risks and benefits involved. In these circumstances, excise duties are inconsistent with standard efficiency and equity criteria.

The social cost argument for excise taxes is dubious. Most costs that arise from the consumption of liquor are met by the affected consumer and the household unit, not by other members of society. The consumer bears the adverse effect on his or her productivity (for example, through lower wages and impaired promotion prospects) and many costs associated with alcohol-related accidents and illnesses (through insurance premiums and the loss of enjoyment of life) and anti-social behaviour (fines and other penalties).

The main categories of costs that are not fully imposed on the consumer arise from the provision of most health services free of charge, from some aspects of the Accident Rehabilitation and Compensation Insurance Corporation (ACC) scheme and from the criminal justice system which does not permit victims to be compensated fully by offenders. The government could take action to place the costs more directly on those responsible for generating them. The relevant policies, however, are not specific to costs arising from the consumption of liquor.

If these policies are retained in respect of other activities, it is unlikely that a more economically efficient outcome can be achieved by applying selective taxes to consumers of liquor alone. Even if this approach were adopted, a substantial reduction in taxes would be justified. The costs of health care and accidents that relate to the use of beer, wine and spirits would not warrant the present levels of duty.

Excise taxes are an inappropriate means of attributing social costs to users. They affect all consumers of beer, wine and spirits rather than people who engage in anti-social behaviour only. Would it be sensible to impose excise taxes on ammunition because some shooters are involved in accidents?

Excise duty subjects significant numbers of members of low and moderate income households who consume beer, wines and spirits to higher levels of total taxation than households with members on comparable incomes who do not consume such products. Similarly, households with members who drink liquor and earn similar incomes pay varying amounts of total tax depending on the level of their consumption. These outcomes are inconsistent with the principle of horizontal equity which states that households in like situations should pay the same amount of total tax.

Since 1984 tax reforms have removed or reduced most highly distorting taxes. Excise duties on beer, wine and spirits have not yet been addressed although the government has accepted as a principle that only GST should apply to these products. Selective taxation is likely to be an inefficient method of raising revenue relative to broad-based taxes at a uniform rate because it distorts the patterns of trade and personal consumption. It creates unintended anomalies as technology and tastes change. It penalises groups in society, often unintentionally, and sometimes as a result of attempting to relieve the burden on someone else.

Excise tax on liquor needs to be addressed on a first principles basis in establishing an efficient regulatory framework for the supply and consumption of liquor. The Advisory Committee should recommend that the government undertakes such a review.

The thrust of this submission is that the regulatory framework for the supply and consumption of liquor should be brought into conformity with that of other products, except where there are valid public policy grounds for industry-specific interventions. Many other products or activities involve risks and the possibility of abuse, yet are not subject to anything like the degree of control and punitive taxation as liquor.

People derive substantial benefits from the consumption of liquor. The vast majority of users act responsibly. Policies that target the misuse of liquor rather than responsible consumption are required to address anti-social behaviour.

The prime responsibility for encouraging young people to use liquor appropriately rests with their parents. The government's main roles are to establish and enforce laws which uphold the rights of all citizens and to fund health programmes that treat alcohol abuse. Industry participants have an important duty to foster responsible attitudes to drinking and to comply with the liquor laws.

Most present regulatory interventions focus on the control of the supply of liquor. This approach was correctly rejected by the Laking working party and has been further discredited since its report was completed. The primary focus of the Advisory Committee should be to recommend rules that help to bring the drinking decisions of young people into conformity with the wishes of their parents and guardians. If such rules are to be credible, they will need to command wide support within the community, and be practicable and properly enforced. Most industry-specific regulations are not required for the achievement of these objectives, and the Committee should propose their abolition.

This cycle has run its course with the abolition of import licensing, financial market deregulation, goods and services tax, liberalisation of shop trading hours, port reform, the Reserve Bank of New Zealand Act 1989, corporatisation and the great majority of New Zealand's other recent economic reforms.

We seem to be in the third of these phases with the Employment Contracts Act 1991 (ECA). Two general elections after its implementation, one of them under new electoral rules, the ECA seems to be securely in place. Five years ago opponents of the ECA outnumbered supporters by nearly two to one; in recent polls more people have approved of it than disapproved. At the last general election, 60 percent of the electorate voted for parties which supported the ECA. This was reflected in the coalition agreement to retain the legislation and indeed to address some of its weaknesses. In its negotiations with New Zealand First, Labour backed off its policy of repealing the ECA, and it will no longer be credible for Labour to revert to that stance. Moreover, unlike the situation under first-past-the-post, there seems little prospect under the mixed member proportional system of any coalition of parties committed to repeal of the ECA being able to form a government.

Developments and debate internationally have confirmed the correctness of New Zealand's decision to opt for a flexible, decentralised labour market. The Howard government in Australia has abandoned the centralised Accord and it seems unlikely to be revived. Britain, the only Organisation for Economic Cooperation and Development country besides New Zealand to implement major labour market reform in recent years, now has an unemployment rate of 6.5 percent, whereas unemployment in much of continental Europe is around twice that level. The flexible US labour market has created a net 8 million jobs since 1991, whereas the European Union has lost 5 million. And the fast-growing Asian economies with the freest labour markets of all are continuing to maintain high growth and low unemployment.

Of course, not all of these improvements can be attributed to the ECA. Separating out the effects of the ECA from other influences is a difficult, if not impossible, task. The best attempt has been made by Tim Maloney of the University of Auckland. His latest work suggests that around 16 percent of the growth in employment – itself a large number – may be directly due to the ECA, and an indeterminate amount (at the limit 100 percent) may be due to its direct and indirect effects combined. However, Maloney's results are driven largely by the postulated employment creation effects of the fall in unionisation in different industries. While this effect is plausible (since we have long known that unions and collective bargaining in regulated labour markets are bad for employment), it captures only part of the job creation story.

In my view, the problem of estimating the employment effects of the ECA in a precise way with any analytical model is virtually intractable. One can get a better feel for them by looking at the comparative experiences of New Zealand and Australia in recent years. While economic growth in New Zealand and Australia has been similar since mid-1991, employment growth was 15.1 percent in New Zealand, compared with around 8 percent in Australia. Unemployment has fallen in New Zealand to 5.9 percent of the labour force, but it has fallen from a similar peak in Australia to only around 8.5 percent. Moreover, virtually all Australian observers expect unemployment in Australia to remain stuck at about that level over the next few years because the Howard government has done too little to create a genuinely free labour market, whereas in New Zealand unemployment should continue falling.

Thus there is little doubt that the ECA has been a phenomenal job creation machine, whereas the previous regime was a machine for job destruction. Under the Labour government's unbalanced economic framework, employment actually fell (by 17,000 jobs) in New Zealand between 1984 and 1990. The ECA has also brought about enormous changes in enterprise culture, in particular, far greater trust and cooperation in workplaces, less disputation and more job security. However, some critics have still not given up: the patently silly claims about the 'Richardson recession' and then 'jobless growth' have given way to debates about productivity and income trends. I am confident that events will show that the critics' views on these issues are equally mistaken.

On productivity, the argument is that productivity growth has been poor since 1991. A forthcoming New Zealand Business Roundtable study by Geoff Hogbin will explore this claim in detail. No one should expect growth in average labour productivity to be sensational at a time when the economy has been absorbing thousands of unemployed workers, many of them with low skills. This point notwithstanding, microeconomic data, such as firm-based surveys, point to significant productivity gains: the New Zealand Institute of Economic Research found that 75 percent of firms considered the net impact of the ECA on productivity had been positive. Moreover, the best general study to date, by Professor Viv Hall of Victoria University, shows no story of a slowdown even in average labour productivity. Far from being 'poor', labour productivity growth has held up at an average of 2.0 percent a year. More importantly, the post-ECA economic expansion shows much greater capital productivity growth (2.7 percent versus 0.0 percent) and considerably higher total factor productivity growth (2.3 percent versus 1.3 percent) compared to the previous expansion phases. With the labour market tightening, future growth in output will depend increasingly on productivity growth driven by investment in physical and human capital, continuing structural and technological change, and a sound structure of incentives in all markets.

In respect of income trends, the Treasury pointed out in its post-election briefing that some degree of wage disparity between high- and low-skilled jobs is needed to generate the dynamic processes required to make human capital a more significant driver of productivity growth, and over time to reduce poverty and income disparities. The post-ECA period has seen greater rewards for skill, and the number of industry trainees is at an all-time high. The ECA has also brought about a radically changed relationship between labour market insiders and outsiders, with the unemployed having greater opportunities to compete for jobs. The available data suggest that measures of poverty and inequality both increased with rising unemployment in the late 1980s and early 1990s, due to the Labour government's failure to tackle the problem of the rigid labour market. From 1992/93, the trends appear to have reversed, consistent with the view that economic and employment growth are the key drivers of reducing hardship.

Recent research also reported by the Treasury highlights the significant employment effects of the welfare system reforms of 1991. This research shows that the widening of the gap between income from employment and income from welfare benefits increased labour force participation by two percentage points; increased total employment by 2.5 percentage points; reduced the unemployment rate (as defined in the Household Labour Force Survey) by 0.7 of a percentage point; and induced more young adults to participate in education and training.

Thus while some people were obviously worse off immediately after the benefit cuts, the longer-term results have clearly been positive for many. For most people the best way out of poverty is to get a job, even at a low entry level wage. Just over a quarter of people in the lowest 20 percent of the wage and salary distribution move to a higher income group within a year. Moreover, the data suggest that people on low wages and salaries tend to receive on average larger proportionate increases in remuneration than those higher up the earnings distribution.

Thus New Zealand's experience provides strong confirmation of the view that modern unemployment is largely attributable to regulations which impede the functioning of labour markets and poorly structured welfare systems. Europe, with both highly regulated labour markets and big welfare states, has endemic structural unemployment. The high-income Asian countries have maintained open and competitive labour markets and avoided large-scale state welfare, and have consequently enjoyed low unemployment, rapid economic growth and a relatively even distribution of income. Naturally, general economic growth also assists job creation, and is in turn fostered by sound labour market and welfare policies.

It has been a matter of great frustration that most New Zealand commentators have missed the importance of these policy reforms in alleviating New Zealand's unemployment problem. For 10 years the Business Roundtable has been arguing that unemployment in New Zealand is an economic and social scourge (there are still some lame brains who think employers benefit from 'a pool of unemployed'); that the levels reached in the 1980s were a disgrace; and that restoring full employment is a wholly feasible objective. For much of that time our arguments fell on deaf ears. Even Bill Birch, one of the architects of the ECA, could not see the unemployment rate falling below 7–8 percent. The Department of Labour has been consistently far too pessimistic with its unemployment forecasts, and the latest drop in the unemployment rate to 5.9 percent again came as a surprise to most commentators. Lately we have been arguing that full employment – which probably means a measured unemployment rate of perhaps 1–2 percent, because people are always joining or leaving the labour force or changing jobs – should be achievable by the year 2000. I suspect most people still do not take that proposition seriously. Journalists seldom bother to report our efforts to promote such goals; they like to concentrate on issues that excite reaction. Yet, as the head of the Treasury in Australia has put it, unemployment is not inevitable – it is largely a matter of choice.

New Zealand will continue to make further inroads into unemployment only if it maintains sound economic, labour market and welfare policies, and improves them where possible. It will not do so if it gets diverted into palliatives such as so-called job-creation or work-for-the-dole schemes. Most of the existing Department of Labour schemes do nothing to increase total employment and, given today's much more favourable labour market, they should be scrapped. This is not to knock the thinking behind work-for-the-dole proposals: people should be strongly encouraged to move from welfare into work, and those receiving assistance from other taxpayers have a reciprocal obligation to become self-supporting wherever possible, whether they are on the dole or other benefits. It is simply that such thinking should be refocused back towards more fundamental labour market and welfare policy issues.

This conference is about industrial relations, so I shall elaborate only on policy issues in this area. The most important of these is the problem of the Employment Court or, more precisely, the tangle created by the combination of the decisions taken in 1991 to enact statutory personal grievance procedures and to retain a specialist labour court.

These provisions of the ECA were a great mistake, as many of us argued at the time. The court has come to be known as the Unemployment Court, because it has manifestly kept New Zealand's rate of unemployment higher than it would otherwise have been. I would estimate conservatively that unemployment would be below 5 percent by now were it not for these deficiencies in the ECA and the attitude of the courts to its administration.

Whatever the precise magnitudes, there is no question that unjustifiable dismissal laws are a tax on employment and that they mostly hurt workers and the unemployed – not owners of capital who, at least in the long run, can redirect their capital elsewhere, including overseas.

Since that time the right of workers to quit at will (subject to any terms of a contract) has not been put in question – even though some decisions to quit clearly inconvenience or harm employers. Prior to the 1970s the same rules applied to employers, and until the ECA was introduced they did not apply to the large proportion of the workforce who were on individual contracts and were not union members. The ECA was a massive step backward in this regard, and Employment Court rulings have made the problem worse. The extension of the law to employees in the executive category, for example, is probably the greatest protection system for incompetent managers ever devised. Inevitably, consumers end up paying the costs.

Behind these developments is the same ideology that was rightly set aside in reforming most other features of New Zealand's labour law, namely that helpless employees must be protected from omnipotent employers. We all deal satisfactorily with banks, retailers and other firms with far greater resources than we have, without the aid of laws on minimum deposit rates and maximum retail prices, and without resorting to unions of savers or consumers. This alone suggests that there must be a strong measure of myth in the doctrine of unequal bargaining power. If bargaining power was a systematically one-sided problem – as opposed to something which fluctuates with market conditions and which affects employers and employees alike – we would expect to see wages driven down towards zero in countries without minimum wages, employees without the power to quit at will, and the prices of goods sold by big firms tending towards infinity.

Of course, none of this happens, because it is not the difference in resources between buyer and seller that matters, but the alternatives available to each. Employers and workers are not in competition with each other: employers are in competition with other employers for workers and employees are in competition with other employees for jobs. In all markets, including the labour market, the best protections for savers, consumers and workers are freedom of entry and exit on both sides of the market, and openness to competition. Hong Kong has no minimum wage or unfair dismissal laws. Because these freedoms have helped it to maintain virtually full employment despite massive structural change, its workers are not easily exploited and they now enjoy average incomes 50 percent higher than those of New Zealand workers.

This is not to say that employers and employees have no inclination to behave opportunistically. Rather, the circumstances in which opportunistic behaviour is profitable are relatively rare. One reason is that it is normally profitable to strive to achieve and maintain a reputation as a good employer. Another is that contractual arrangements have evolved through market processes to safeguard against opportunistic behaviour on the part of both parties to an employment contract.

Beyond the issues that arise in standard contract law – such as fraud, misrepresentation and duress – employment contracts do not leave gaps or implied terms that courts need to fill. Employment contracts are made every day; the costs of contracting are low; and people can evaluate realistically the risks and costs of contingencies such as dismissal. If it is optimal for workers to have job security or just dismissal provision they will negotiate one voluntarily because the barriers to doing so are trivial. If not, they will choose to avoid the costs to them of lower wages or other less favourable terms in their contract which are the inevitable trade-off for greater job security. In short, mandatory unjustifiable dismissal provisions diminish the value of the compensation bundle for most employees.

Thus the problem that activist legislators or courts seek to address is an imaginary one, and their decisions harm the very parties they hope to benefit as a class. Activist judges often find meddling in other people's affairs a rather pleasant burden, but this tendency lends itself to abuses of power. The law has no economic rationale for a good faith or fair dealing intervention in labour relations. Economic competition does not create a perfect world, but on both the demand and supply sides of the market it provides incentives for civil and cooperative behaviour. Firms do not sack workers willy nilly; such practices are virtually unheard of as they are bad business and the costs of changing staff can be high. New Zealand employers have every incentive to keep and reward quality employees – after all, there are over 200,000 firms that can bid them away at any moment. The at-will contract is often the best mechanism for establishing terms of employment which avoid vulnerabilities, opportunism, one-sidedness and monopoly by either party in an employment relationship. If, subject to the terms of a contract, an employee can quit at any time, the firm has every reason to be responsive to the employee's concerns. If, subject to the terms of a contract, an employee can be dismissed at any time and for any reason, that employee has every reason to be productive. Productivity creates job security.

There are signs in the coalition agreement negotiated by National and New Zealand First that some of these realities have finally been recognised. The document refers to "judicial activism", and hints at the possible termination of the separate jurisdiction of the Employment Court. The briefing provided to the coalition parties by officials during the negotiations highlighted the problems of legalistic 'good faith' and 'fair' bargaining doctrines.

In its briefing to the incoming government, the Department of Labour raised the question of whether the problems experienced with decisions by the Employment Court and Court of Appeal were best addressed by legislative amendment or changes to institutional structures. The answer is that both are needed.

The National government drew back from abolishing the separate jurisdiction at the time the ECA was passed because some of its members regarded that move as a bridge too far at that stage. They took the view that after it became clear through experience that employment contracts were no different from other contracts, the task could more easily be handed over to the general courts. That step should now be taken. In addition, now that the government has sensibly dropped the idea of abolishing appeals to the Privy Council, access to that court for employment cases should also be reinstituted on the grounds that this area of the law should be treated no differently from other commercial contracts.

If the courts could be trusted to administer employment contracts on the same basis as other contracts, there would probably be no need for an employment statute at all. Until that point is reached, parliament needs to make its intentions clear, and the most important change needed to the ECA is to put beyond doubt the ability to freely negotiate at-will contracts, including contracts requiring a simple period of notice before termination. At most, parties should have as a default option the right by negotiation to adopt statutory dismissal provisions or, less desirably, to opt out of them. Various other provisions of the ECA should also be simplified or discarded. As a minor example, no purpose other than bureaucratic and academic employment is now served by putting firms to the cost of reporting the details of thousands of employment contracts to the Department of Labour, and this requirement should be dropped.

Obstacles to job creation in other employment legislation should also be addressed if New Zealand wants to take seriously the objective of restoring full employment. An example is the current statutory minimum wage, which is a prime illustration of confused thinking on how to help people at the bottom end of the labour market.

The coalition parties have decided to increase the adult minimum wage to $7 an hour and may increase it to $7.50 next year. This new obstacle to the rights of low-skilled people to sell their own labour is an extraordinary decision. At $7.50, the minimum wage would be above the level of the minimum wage in the United States, yet average incomes in New Zealand are only around two thirds of US levels. There is little argument among economists in the United States that its minimum wage laws typically cost jobs: the only debate is over the numbers lost.

Clearly the relative impact of the coalition government's decision will be far greater. It went against the advice of all its departmental advisers in making this decision – even the Department of Labour has now come round to warning of the negative effects of minimum wage laws. These fall most heavily on the young, the unskilled and less productive workers – the very people who should face the fewest obstacles to getting a foothold on the bottom rung of the earnings ladder. Labour and the Alliance are even more strongly attached to a policy which panders to populist instincts and the interests of their supporters in the union movement, but which offends any rational concept of equity.

Other employment legislation hinders job creation. The government plans to review the Holidays Act 1981, where basically the principle of voluntary choice and freedom to contract should be allowed to prevail. The Human Rights Act 1993 discourages employment by raising the costs of hiring through restrictions on advertising and recruitment. Privacy and occupational health and safety laws have also increased employment costs and risks for firms. The gross inefficiencies of the Accident Rehabilitation and Compensation Insurance Corporation, which accounts for the largest element in non-wage labour costs, are another major employment tax which affects jobs and wages. It is distressing that the Labour party still keeps coming up with ideas like maternity leave legislation which would increase non-wage labour costs and hurt the employment prospects of the very people its members tell us they care about, in this case women in the child-rearing age group. There is an equally long agenda in the welfare area which would include such things as time limits or two-tiered levels for unemployment and other benefits, and greater obligations on beneficiaries to seek and accept work.

However, there is a lot more that could be done to improve the operation of New Zealand's labour market, our employment prospects and economic growth. There is clear evidence that labour markets work if they are not constrained from doing so. Because unemployment is largely a matter of policy choice, those who resist the removal of these constraints either do not understand how labour markets work or they must argue that unemployment should be accepted because the costs of eliminating it are too high. That is a hard argument to make.

In a recent lecture on why some nations are rich and some poor, the distinguished economist and public choice theorist Mancur Olsen said: "The best thing a society can do to increase its prosperity is to wise up." He was making the point that economic performance is mostly determined not by a country's natural endowments, the availability of technology or capital accumulation, but by the institutional arrangements it adopts and the structure of incentives they generate. Olsen added that those who prevail in the fight against special interests and quacks make an extraordinary contribution to the amelioration of poverty and the progress of humanity. When it comes to labour markets, and the entirely feasible goal of becoming a high employment, high productivity and high income economy, will New Zealand have the wit to "wise up"?

You have asked me to talk about curriculum issues and, in particular, to address some of the philosophical issues that should underpin your work. The invitation said that you are re-examining issues such as the purposes of education and what effective education might mean. I welcome the invitation and more especially the time you are taking out to think about deeper aspects of your task without the distractions of immediate crises. I read into your invitation a certain licence to stimulate, even to provoke, and I trust I did not infer more than was intended.

The ministry of education in New Zealand has began the task of reorganising the national curriculum for New Zealand schools. The aim has, in part, been to rein in disparate parts of the previous curriculum within a more coherent framework and to be more precise about what children should be taught at various stages of their education.

I don't propose to review the particular processes that were adopted – the levels, the essential learning areas, the essential skills, the structure of aims and outcomes, and so on. I have addressed these in other papers and on other occasions (Irwin 1994a and b, and 1996a and b). The individual curriculum statements have been the subjects of submissions or critiques by the Education Forum which are on the record.

I very much hope that your present exercise is the beginning of a rethink about those structures and materials. If so, you are starting at the right place – the assumptions underlying education and the issue of what an effective education system might look like. Of course, such questions raise many issues, but I will confine myself to the assumptions related to the curriculum.

You will need to be on your guard against simplistic approaches that skate over more fundamental issues as if they were not problematical. So often we hear statements that clearly imply that all that is required is increased budgets, improved equipment, and access to the latest technological resources and, hey presto, educational standards would rise in immediate and direct response. Unreconstructed politicians, bureaucrats, teacher union officials and media commentators say this all the time. They infer that the basic aims of education and the means by which they should be achieved are all clear, and it is only sophists and professional agitators in places like the New Zealand Business Roundtable who think otherwise.

We have, of course, a national curriculum and most of the key curriculum statements are in place. Certainly there are unresolved issues, and ironically the ministry appears to need assistance in establishing what the rationale for Social Studies might be (Education Review, 23 January 1997). My question would be rather different and more fundamental: whether there is a rationale for Social Studies as a separate subject at all. While you do not start with a tabula rasa, we can look at the new curriculum documents to raise questions and observations about the fundamental philosophical questions with which you are presently engaged. But you should never, as policy analysts, accept the status quo, however recent, as set in stone for all time. If, as I would aver, much of the recent curriculum work has been of second-rate quality, you must be ready for those windows of opportunity to make changes for the better. But you must know what the first-rate configuration might look like if the changes you advocate are going to take you nearer it rather than further away.

It is as well at this stage to make an obvious but important observation. The school system is extensive – some 2700 schools and 40–50,000 teachers. Basing the curriculum on the soundest assumptions is only the start. David Hargreaves wrote recently what many others have said before:

Certainly, the New Zealand education system does not suffer from an auto-immune deficiency syndrome. It resists all assaults, perhaps especially those which have to do with pedagogy and epistemology. The resistance to critiques of the 'whole word' teaching of reading, child-centred pedagogy, or of forms of constructivism have often taken the form of personal attack on those making the criticisms. The ministry, in my view, is too often unwilling to engage in serious conversation on such matters. Too often it seems to say in effect that 'this is the way it is, this is the way it is going to remain, and if we haven't analysed everything in writing to the degree some pedants think necessary the sector can nonetheless be confident that all relevant research findings are in our heads, and that we know the answers. Moreover, we are not interested in contrary views'.

Christopher Woodhead, the Chief Inspector of Schools in England, put a very different view recently. He said "The debate in education should be characterised by a sense of intellectual adventure: by an enthusiasm for a critical reflection on ideas, values, assumptions, current practices, by a refusal ever to allow a working hypothesis to harden into unexamined orthodoxy." (Woodhead 1995)

How should we go about investigating our 'working hypotheses' and examine whether they have hardened into unquestioned orthodoxy? I suspect the answer – or an important part of it – is to maintain foremost in one's mind a sound view of the nature of the educational enterprise, and for this I will take as my text Michael Oakeshott's essay Education: The Engagement and its Frustration. Oakeshott said education is:

The education enterprise is, for Oakeshott, central to the human condition. Thus no enterprise is more important, for to be without these understandings is "to be not a human being, but a stranger to the human condition." But I would stress his observation that to be educated is not a natural condition. His starting point is, in fact, that education "is a difficult engagement of learning by study in a continuous and exacting redirection of attention and refinement of understanding which calls for humility, patience and courage."

In case this sounds hopelessly Victorian or perhaps just conservative, let me quote Gramsci, a leading member of the Left in Europe between the two world wars. He wrote:

It seems to me that both the 'conservative' Oakeshott and the Marxist Gramsci were saying much the same thing. And what they were saying is very far from the emphases we find in the principles of the New Zealand Curriculum Framework, which are more on what schools must do for students – the enabling, empowering and respecting of students – and not what is required of students themselves, such as the effort to be exerted, the tedium and difficulties to be faced, and the self-discipline required.

Oakeshott was also interested in what he called the 'intellectual virtues' and asked questions such as these:

Oakeshott is a deeply unfashionable philosopher in contemporary educational circles, and it comes as no surprise that we find few references to these intellectual virtues in the curriculum documents. We find instead repeated emphases on the school curriculum as a means of creating a certain sort of person to take his or her place in a certain, preconceived sort of society which is part of a "competitive world economy" (Ministry of Education 1993). This is an approach to education which Oakeshott would call 'socialisation', by which he means "systematic apprenticeship to domestic, industrial and commercial life".

I do not, for a moment, mean to imply that education has no part to play in preparing young people for the world of work. Indeed I am on record for saying that one of the great disappointments with the National Qualifications Framework is that it promises not only to trivialise much of 'academic' or 'general' education but also is unlikely to provide quality vocational qualifications for those who, for reasons of ability or aspiration, intend to go into the workforce on leaving school.

But this workplace orientation is not, I suggest, at the heart of the educational enterprise. Indeed for Oakeshott the substitution of 'socialisation' for education is a disaster of enormous proportions. Education is the disinterested study of what Matthew Arnold referred to as "the best that has been done and thought". It has no extrinsic purpose. 'Socialisation', on the other hand, can, as Woodhead has pointed out, only be justified in terms of goals external to itself which it is meant to achieve – social engineering, human resource management, and the like. Oakeshott saw this substitution as "the most momentous occurrence of [the 20th] century, the greatest of the adversities to have overtaken our culture, the beginning of the dark age devoted to barbaric affluence."

If we do not recognise the deeper, intrinsic purpose of education we will be swept this way and that by educational and other fashions. Indeed in education we seem to grasp fashions from overseas more quickly, usually when they are beginning to wane elsewhere, to hold on to them longer, and to apply them with less care and more injury to the public good than other sectors of the community. Our commitment to the 'whole word' method of teaching reading to the substantial exclusion of phonics is an obvious case in point, but let me give you some other examples.

The concept of 'accountability' has been given strong emphasis in recent government reforms in New Zealand. In my view this has been all to the good in most cases. Yet in education we have taken this proper and much needed concept to ridiculous lengths in both our curriculum and qualifications frameworks. The curriculum framework document says that the national curriculum statements will specify clear learning outcomes against which students' achievement can be assessed. The design of the unit standards of the qualifications framework requires, in the oft-stated words of a former minister of education, 'clear and transparent standards'. Obviously, in the interest of exercising accountability, we would like to know ex ante what is to be taught and ex post what the student has actually learnt. But the way the concept has been developed has ignored the lessons from the study of behaviourism, the understandings of epistemology and the very finite limits of assessment technology. Certainly in the National Qualifications Framework we are facing an enormously costly monster and, in my view, much potential damage to the education of many young people.

In our curricular documents we refer to New Zealand's bicultural identity and multicultural society – themes which pervade the drafts of the Social Studies curriculum. But what on earth can a bicultural identity and the related and popular notion of partnership mean in modern New Zealand? It would seem to imply a society in which there are two cultures of approximately equal significance. Yet this is manifestly not so, and cannot be so. It is not a question of demographic statistics, of the unequal distribution of Maori and non-Maori in the population. One obvious fact is that all significant civic, legislative, constitutional and legal institutions of New Zealand are Western – or to be more precise of British origins, which themselves draw on even older thought and traditions including Greek, Roman, Hebrew and European philosophy over the last two thousand years or so. The language of everyday commerce is English using the Roman script and Arabic numerals. (I would note in passing that medieval Arab scholarship is also very much part of 'Western' culture). None of this is to denigrate the considerable achievements of Maori culture. But it is interesting to note that current arguments advanced by Maori for reparations for past injustice to Maori are couched in terms of current Western moral concepts – not those of traditional, pre-contact Maori culture.

The 'Westernisation' of New Zealand should come as no surprise. Western civilisation has a range of cultural possibilities which were simply not open to indigenous societies whether in New Zealand, the Americas or elsewhere (Minogue 1997). This is what makes Western culture so dangerous, or so it may seem to some. It can absorb other cultures, even take on some of their aspects, without itself being affected to any significant degree. It is the case for separate development – though not, of course, by the discredited name of 'apartheid' (Minogue 1997). It does no good to perpetuate through the school curriculum views about our national identity which do not withstand serious scrutiny, and which are likely to promote friction based on false hopes and a misreading of our society and its history.

We have a different form of this current bicultural concern to place equality above facts and history in what I might term 'bi-genderism'. The view here is that the curriculum must give equal weight to the contributions of women and men. We find this particularly in the English and Social Studies drafts. The problem in the former is that there was no equality in the literary contribution of men and women until relatively recent times and, as regards the latter, that the vast majority of events recorded in history related to the deeds of men and not women. Ignoring these facts – trying to establish some sort of ex post equality – is not education but indoctrination.

And multiculturalism – what does it mean? Well, certainly New Zealand is multicultural in that its population has diverse ethnic and cultural origins. But while we can accept multiculturalism as a fact, multiculturalism as an ideology is highly debatable. It does no service to confuse the two, as we do in various curriculum documents, by observing that New Zealand is multicultural and then proceeding as if the ideology is beyond debate.

Multiculturalism as ideology has become the moral mission of much of Western education (Orwin 1996) and has deeply influenced New Zealand education, often in a surreptitious, ill-informed way. The notion of multiculturalism depends on that of culture. More precisely, it depends on the relativistic understanding of 'culture' which currently dominates much of the English speaking world (Orwin 1996).

In its older sense, as in the expression 'a cultured person', the transmission of culture was the noblest task of the education system and especially the university. This traditional view of culture wasn't elitist – the cultural delights of the aristocracy were to be available to all. Arnold, to whom I have already referred, saw Western culture, deriving from Hellenic and Hebraic roots, as the very opposite of dogmatism and its only effective antidote. His view was that it "alone can lift us above our petty passions as individuals and those of party and time. Culture was good not only for the individual but for the polity: it defined the education suitable for free men" (Orwin 1996).

All this changed in the 1950s or there abouts. Multiculturalism is now not just a statement of fact (the existence of ethnic and cultural diversity), it is an ideology and a political statement. It embraces not only the notion of cultural relativism but the civil rights movement, the various liberation movements that began in the United States, the post-modern celebration of difference and the anti-Americanism that became generalised into anti-Westernism (Orwin 1996).

If all cultures must be presumed equal then there is no reason why the education system should transmit one to the exclusion of others. It is ironic that this whole business of cultural relativism is essentially that of modern Western liberalism, and promoting multiculturalism is promoting a set of notions currently fashionable in Western, and especially English speaking, countries. And, of course, we do not in fact accept that all cultural practices are of equal worth and should be valued – the strictures of the New Zealand Curriculum Framework and the drafts of the Social Studies curriculum notwithstanding. But, as has been pointed out, the appeal of multiculturalism has never depended on its theoretical consistency; its appeal is political (Orwin 1996).

It may seem profoundly shocking to suggest that what is happening in New Zealand as regards ethnic relations and social relations more generally is an example of a widespread international fashion. The problem with fashions is, of course, that they come and, sooner or later, go. The danger of becoming locked into what will turn out to be a passing fashion is a real one, and the ministry should guard against such possibilities by actively promoting the enthusiasm for critical reflection to which I have already referred. Indeed I understand that such promotion is precisely one of the aims of this planning session and a reason why I was invited to speak to you.

It will be asserted no doubt that in ethnic relations the Treaty of Waitangi makes the difference – that the New Zealand situation is unique. Well, of course, in a banal sense every country is unique, and there are some unusual characteristics about the nature of the Maori situation at first contact with the 'West'. But I would challenge New Zealand's essential uniqueness on a number of grounds. First, the issue of how minority ethnic groups should live within a country with a dominant culture is far from unique. It exists in many countries. Secondly, there are many examples of treaties between indigenous ethnic groups and the dominant culture – especially, perhaps, in North America. But I am not sure that the existence of a formal treaty is all that important in present day multiculturalism, and I suspect that had there been no formal Treaty of Waitangi we would have invented one ex post.

How then should minorities identifying with an indigenous, pre-Western culture, relate to modern society? At one level, Maori and Pacific Island people are already very much part of Western New Zealand – they are already Westerners in terms of our constitutional and legal arrangements, and more generally the social, cultural and economic life of New Zealand to which many do, of course, make a very substantial contribution. It many ways New Zealand is a remarkably successful society – our squabbles not withstanding. While I don't think for a moment we should ignore those difficulties, it would be unfortunate if we lost sight of our successes as a nation and stressed only the problem areas.

But I return to the question about how people identifying with different cultures should live together in one society. In my view it is, as Melanie Phillips has observed, perfectly possible to identify with two cultures: a common civic culture and a private ethnic one (Phillips 1996). This is what in fact we find in New Zealand. We have a broad civic culture of essentially British origin and many minority cultures within it. The taxi driver who took me home from the airport last week was an Indian from Fiji who attends a Hindi speaking cultural group and a Hindu temple. Neighbours of mine are busy rediscovering their supposed Celtic roots, attend Celtic Christian services and lead a band playing Irish and Scottish music. Another neighbour runs a Scottish country dance club. There are many Maori and Pacific Island cultural groups. I could go on.

But all these 'cultures' operate within a broad, common civic culture which is essential if we are all to live together in anything approaching harmony. A common civic culture sets limits on what each individual and group within it can do without creating disharmony. Without a common civic culture, there is, as Phillips has observed, "no reason for minorities to compromise their sometimes mutually incompatible demands. We would end up with the politics of protest, single issue lobbies, acts of violence and tribalism. It is not in the interests of either the majority or the minorities to weaken it" (Phillips 1996). Nicholas Tate, the chief executive of the Schools Curriculum and Assessment Authority for England and Wales, said much the same:

Yet, there is much in some of the new curriculum documents which appears to seek to undermine our common and, in my view, very successful, civic culture. Why?

Well, what do these observations mean for education?

First, it should give all New Zealand children access to the majority culture so they can take their place within it as full citizens. We are fortunate in New Zealand in having direct access in the English language to some of the finest literature the world has ever known – yet we largely disregard it in our English curriculum. Why? Such literature – and not only that of English speaking writers – wrestles with the problems and passions of being human – the world of understandings, imaginings, meanings, moral and religious beliefs and so on – which, as Oakeshott observed, are intrinsic to the human condition and the knowledge of which introduces us to that condition. Romeo and Juliet can be set in modern New York and still command attention because, like other great literature, it is a repository of human experience, representing different ways of observing and explaining the world – not simply a drama involving issues peculiar to England or Italy at the time of Elizabeth I.

All students should have access to this immensely rich cultural inheritance. G. K. Chesterton responded to those who question the relevance of a broad cultural education to the more vocationally oriented in these words:

Many writers, artists, film and television producers appear to feel, to use Saul Bellow's words, that "it is sufficient to cast artificial pearls before real swine. This is how the modern world meets the deepest of human needs – by fraud, demagogy, opportunism, and profiteering" (Bellow 1994). The hunger for the 'real thing' remains, however. Witness the regular productions of Shakespearean plays, the current widespread appeal of Jane Austin and last week's lavish production of Aida. But I fear the new English curriculum is not designed to attend to that hunger of the soul because it has other aims of a 'socialisation' or utilitarian nature.

On the issue of the more utilitarian aims of education, it seems to me that some educationalists are responding to perceived views from the business sector about the need for 'skills' or 'relevance' in education. Older educationalists would rightly have regarded such views as barbaric. But, in my experience, business today is not saying that – it looks for foundational knowledge, evidence of the 'intellectual virtues', and such like. Oakeshott's barbarians are already within the gates.

Secondly, education must not be propaganda designed to change society or to instil within the popular mindset particular but misleading views about the organisation of society. One example of this is the attempt in the drafts of the Social Studies curriculum to entrench the idea of partnership between Maori and the rest of society to such an extent that this at least will become one bit of the world that will not change (Minogue 1996). Another is to break, or at any rate to substantially weaken, New Zealand's cultural links with Britain and Europe, and to imply that our cultural origins lie almost entirely in the South Pacific and neighbouring countries. This contention simply doesn't stand up to any sort of scrutiny and will result in cultural deprivation with no compensating benefits. Schools should not set out to change society, but to equip students with the knowledge and understanding of the human condition and the world about them that might enable them to make sensible decisions about the course of human affairs later in life.

Thirdly, education must not be indoctrination designed to turn out children with particular attitudes attuned to a predetermined type of society. Education should largely concentrate on knowledge. To instruct is not to proselytise, and in my view there is far too much propaganda and far too little emphasis on instruction in some of the new curricular material. There is also an overweening emphasis on skills which suggests we want to turn out citizens of a particular orientation or, as Ken Minogue put it recently, to "invade the child's mind and to dominate it" (Minogue 1996). Children are, in any case, extraordinarily resistant to such invasions, which is just as well for the human race. We cannot predict the outcome of the education process to any precise degree, not least in terms of the eventual attitudes of individual children. We should be largely content to offer them the "best that has been done and thought", and let the results fall as they will.

Certainly education has a moral basis. Oakeshott's starting point was, as I have already noted, that education "is a difficult engagement of learning ... which calls for humility, patience and courage." This means that the student must have the opportunity to study "in conditions of direction and restraint designed to provoke habits of attention, concentration, exactness in thought and conduct." You will remember that Gramsci also emphasised self-control, and the tedium and suffering to be endured. These habits of mind and intellectual virtues are undermined by indoctrination whether this takes the form of imposing a particular view of historical events or seeking to reconstruct society.

Finally, I would pick-up the excellent question in the invitation about what 'effective education' actually means. In a curious way, I suspect that we would improve education by concentrating less on specific standards of achievement and participation rates and concentrating much more on what education should be. In this process we would be concerned to defend what Oakeshott called the educational engagement from beliefs which threaten to destroy it. This means not encapsulating a distorted form of education immune to attack, but opening it up to more scepticism, more probing, more analysis, less emotion. There would be less resort to simplistic 'left/right' political dichotomies or pedagogical dichotomies such as the 'child versus the curriculum', 'learning areas versus subjects', 'group work versus direct instruction', 'phonics versus whole word', and so on (cf. Woodhead 1995). A much healthier and more effective education system would, in my view, result.

Bellow, S. (1994), 'A Matter of the Soul' in It All Adds Up.

Gramsci, A. (1971), Selections from the Prison Notebook, (translated and edited by Q. Hoare and G.N. Smith, London.

Hargreaves, D. (1994), The Mosaic of Learning: Schools and Teachers for the Next Century, Demos, London.

Irwin, M. (1994a), Curriculum, Assessment and Qualifications – An Evaluation of Current Reforms, Education Forum, May.

– (1994b), The Humanities in the New Zealand Curriculum, Paper to the New Zealand Federation of Social Studies Associations, Social Studies Curriculum and Change Conference 1994, Hamilton, 11 May.

– (1996a), Notes for Education Policy Studies Tutorial, Auckland College of Education, 17 October.

– (1996b), Curricular Confusion – The Case for Revisiting the National Curriculum Framework, Principals Centre, University of Auckland, Seminar on Implementing the Curriculum, 18 October.

Ministry of Education (1993), The New Zealand Curriculum Framework, Ministry of Education, Wellington.

Minogue, K. (1996), Foreword to Social Studies in the New Zealand Curriculum – A Submission on the Revised Draft, Education Forum, October.

– (1997), Report on the reconciliation process in New Zealand, New Zealand Business Roundtable, forthcoming.

Oakeshott, M. (1972), Education: The Engagement and its Frustration.

Orwin, C. (1996), 'All Quiet on the (post) Western Front?', The Public Interest, No. 123, Spring.

Phillips, M. (1996), 'Unholy Pursuit of a Common Culture', The Observer Review, 11 February.

Tate, N. (1995), Address to Shropshire Secondary Headteachers Annual Conference, 13 July.

Woodhead, C. (1995), Education: The Elusive Engagement and the Continuing Frustration, Ofsted Annual Lecture.

My subject is The New Zealand Curriculum Framework (Ministry of Education 1993a) (referred to as Framework). Framework claims considerable self-importance. In the first sentence of her Foreword to it, the then secretary for education describes it as an "important document", and she commends it for providing:

I propose to treat it with the importance it claims for itself.

Part of Framework's claimed importance lies in its assumed durability – which I interpret to mean that it will be so imbued with self-evident good sense that it will set a widely accepted ethos and overall direction for school activities for many years to come, riding out short-term fluctuations in educational fashion. And this is as it should be. We don't, after all, expect a new curriculum framework every year or two. However, to be durable a framework must be based on a sound philosophy of education, including a wise purpose for schooling and sufficient flexibility to enable the various components to be set within it without distortion. This may well prove to be a tall order in these culturally plural and post-modern times, but at least it is a goal we should aim at.

I would also note that it is now over five years since the draft National Curriculum of New Zealand – A Discussion Document was published (Ministry of Education 1991). The final document was published two years later and most of the main curriculum statements fleshing out the framework have now been finalised (English, maths, science, physics, chemistry, biology, technology) or have been published as discussion documents (social studies). Draft statements have yet to be published in only two of the seven essential learning areas identified in the curriculum framework – 'arts' and 'health and physical well-being'.

While much implementation work remains to be undertaken, even where statements have been finalised, it is a good time to review where we have got to and to ask some questions. For example, how well have the framework and the individual curricula stood up to criticism? If we were back five years, in 1991, and had the benefit of hindsight, what would we have done differently?

In 1994 the then minister of education claimed that:

I suspect the "almost universal support" would be difficult to sustain. The science, English and social studies curricula generated considerable debate through the media and elsewhere. The Education Forum has been a source of sustained analysis and comment on Framework and the various subject curricula, and some of its comments have been very critical. But Dr Smith was, I think, correct to the extent that there has not been much criticism overall.

We should be careful not to assume, however, that this relative lack of comment on the curricula reforms is indicative of soundness. There are various reasons why we might not have expected a lot of critical reaction. First, much attention has been directed elsewhere – school salary bulk funding, tertiary funding and, in more recent times, the new qualifications framework. Secondly, the new curricula do not impact on teachers and teaching as directly as the qualifications framework will on the senior secondary school. Some principals have pointed out to me that they are not overly concerned with deficiencies in various curricula because they have teachers who will still deliver a good curriculum and disregard whatever they dislike in the new ones. I can understand their stance, but from the viewpoint of the schools sector as a whole we should take criticism seriously. Confident, able teachers can make good judgments about what to ignore and can use their own expertise, experience and resources, while less able and inexperienced teachers will rely heavily on the curriculum documents and treat them as blueprints.

A third reason for the lack of criticism is the absence of any professional teacher body able to critique the curricular – and other – school reforms objectively and professionally. I have no doubt that the teacher associations in the various subject areas do a good job within their available resources. The teacher unions are, at present, the only teacher organisations with the necessary funds, but their prime concern is, understandably, the welfare of their members. The unions have referred to the additional administrative burdens consequent on the reforms, and this concern is quite justified.

Fourth, these 'academic' issues are a lot harder to analyse than the more concrete administrative and financial reforms within education. Finally, our education community is very small – there is only a handful of experts in any particular curriculum area – and there isn't the range of view and debate one would expect in a larger educational jurisdiction. Moreover, these are areas in which agencies outside the educational bureaucracy (for example, the Treasury) have little, if any, expertise and, by and large, do not participate to any significant degree in discussion about them. There is, therefore, little contestability of advice to government.

But, whatever the reasons, the result has, in my view, been a lot of straining at the 'gnats' of issues like salary bulk funding and much swallowing of curricular 'camels'.

So how do we go about reviewing those reforms? First, I want to consider what we might expect of a curriculum 'framework' and to comment briefly on the ministry's policy development processes. Second, I will consider what we find in the framework we have been given. In doing so I will draw on some of the curriculum statements to see how Framework has been interpreted and applied in the various essential learning areas. Finally, I will outline a different approach which was developed in a report written for the Education Forum in 1994 (Irwin 1994c).

These are some of the many vital questions that should, surely, be asked by those faced with the task of constructing a curriculum framework. While in the case of Framework some of the answers are apparent from the text, the reasons for the answers, including why some answers were chosen and not others, are nowhere explicit.

It would be correctly pointed out that the curriculum framework initiative of 1991–93 was itself a development of earlier endeavours, including the curriculum review of 1987 and the draft National Curriculum Statement of 1988 – which themselves had antecedents. For all I know there may be papers somewhere in the archives that address some of these issues. However, I am not aware of any rigorous, high quality examination of the concept of a curriculum framework and how it might best be constructed. Any suggestion that such papers would not be necessary because of the ongoing nature of curriculum policy development is simply not satisfactory because it leaves too many important assumptions unexamined. It would not be acceptable in other policy areas with a long history – taxation for example – and it should not be acceptable in education.

I have urged the ministry in the context of the development of its curriculum statements to issue 'thinkpieces' which identify and address issues and options in the light of relevant theoretical and empirical research. Its response was that this is not its practice because, inter alia, the education community has consistently expressed satisfaction with "the nature of curriculum development which is emerging through the ministry's policy and contractual arrangements" and the minister, as its client, "endorses [its] policy development model". This response begs the question whether the claimed education community and ministerial satisfaction with the existing policy development process is worth very much if papers analysing and evaluating alternative ways of proceeding have not been first prepared and published.

The process for the individual curricula starts with a letter to individuals and groups inviting them to contribute to the policy development phase. While some very general topics are suggested, no detailed identification and analysis of issues are provided. Policy advisory groups are established to work to terms of reference, set presumably by the ministry, and to make recommendations for the specification of curriculum development contracts. I sought the papers of the social science policy advisory group to discover, if I could, how the decisions for the draft social studies curriculum had been arrived at. I received the minutes of a few meetings and was informed that relevant literature was available to, or well known by, members of the advisory group, that the implications of the literature and analyses were discussed at length, and that all the submissions were carefully considered and key points taken into account. The minutes were brief and concentrated on major points and decisions.

The policy group produced no discussion papers. They did obtain a literature search but no written analysis of the material that had been examined – if any – was made available. There was one brief – two-thirds of a page – piece on the strands which considered, inter alia, that their focus should be 'people'. As many curricular areas from art to anthropology, from economics to education, from history to literature, are about 'people', this provided little illumination into whatever the author thought to be an important and defining characteristic of social studies. Perhaps it was again assumed that what was being dealt with was self-evident and/or unproblematic.

Do the other curriculum policy groups work in the same way as the social sciences group? With the exception of technology (a totally new curriculum 'subject') and, perhaps, health and physical well-being, no official thinkpieces of the sort I suggested have, as far as I am aware, been prepared. This method contrasts very sharply with policy development in other branches of government such as the Treasury. Policy changes in areas such as tax, financial management, fiscal responsibility, employment, the role of the Reserve Bank, the state-owned enterprises and many others have been based on extensive analyses including the examination of local and overseas theoretical and empirical research. It has not been assumed that the answers to key issues can be taken for granted. The durability of these reforms and the widespread overseas interest in them owe much to these solid foundations (see Henderson 1996, p. 9; Teece et al. 1996). These reforms have, of course, been criticised, but the extent of their intellectual underpinnings has not, as far as I am aware, been seriously questioned.

Surely there is no good reason why the education policy should be approached differently. Taking important matters for granted is dangerous – dispensing with proper analysis and informed debate is not acceptable because of the risks that the lack of good policy development procedures may impose on the education of the nation's children. Some might argue that education is special. But on examination this usually means no more than 'education is important' which, of course, is true – as are many other areas of human activity. The educational process may also be particularly hard to quantify, but this means it is more – not less – important to think seriously about what we should be trying to do in education and to face up to the complexities, tensions and ambiguities involved. The importance of 'importance' in education, as in much else, lies in the need to make good decisions and in the risks and costs of poor decisions.

A curriculum framework should set an overall direction for the development of school curricula and of the individual subject curricula. What sort of direction does Framework set? What sort of ethos does it provide?

The Foreword (p. 1) to Framework starts, unfortunately in my view, not with education per se but with the perceived needs of the economy. However, having dealt with the "challenges" of the international market place in summary fashion, the Foreword proceeds to tell us that Framework is based on the best of our past curriculum experience and the views of educators, the public and business, and that it responds to the need for a learning environment conducive to high standards of educational achievement and "appropriate" personal qualities. It provides a "balance" between the interests of individual students and the requirements of society and the economy. This, of course, begs all sorts of questions such as:

Having raised the prospect of an interesting discussion, the Foreword goes on to assure us that Framework is "coherent", that it establishes principles to give direction to all teaching and learning, and that it promotes new emphases important to the country's health and growth. Later we are told it is to apply to all schools, all students and to all years of schooling (p. 3). The substantive part of the Foreword concludes with assurances to the effect that Framework is gender inclusive (in a way that suggests that the curriculum needs of girls and boys are very different) and that it acknowledges the value of the Treaty of Waitangi, our "bicultural identity" and "multicultural society". However, and notwithstanding all these prescriptions, schools are to be allowed the freedom to develop programmes that are "appropriate to the needs of their students".

Again important questions arise including:

The answers are not provided, but some indications will emerge – at least implicitly – as we go further through the document.

Overall, what sort of general ethos or direction is indicated from the Foreword to Framework? I find it very hard to answer. Requirements and expectations from various quarters – local and international, personal, community and business – are raised, the existence of tensions appears to be acknowledged, and due obeisance made to current, politically correct, emphases. Will it provide the effective and durable learning environment which we should expect from a framework? Certainly not if the early pages of Framework are indicative of the whole. They contain no clear direction.

Consider an alternative approach from Hogben's primary syllabus of 1904 which said that the aims of teaching reading were:

Of course this sets the direction for only one component, albeit a vital one, of the curriculum and not the whole primary curriculum let alone the whole school curriculum, and there is room for some argument about what constitutes, for example, "good" literature and books. But the contrast is striking in terms of clarity and intelligibility and the lack of reference to non-educational concepts (the Treaty of Waitangi, biculturalism etc.) or external requirements (such as the international market place). I very much prefer it.

The contrast between Hogben and Framework illustrates the additional burdens and responsibilities that have been placed on schools and their teachers in recent decades, and the confusion and curricular complexities that have resulted from this. A prime 'first-order' question is precisely this issue of what it is that schools should be expected to offer and what should be left to parents, communities and community organisations. The boundary of responsibility has been shifted in recent times. It is questionable whether in all cases the responsibilities are proper functions of schools and, indeed, whether moving the boundaries is in the long-term interests of children and the community in general. It is a problem that reflects the politicised nature of schooling, and the fact that many groups in society consider that the state in its provision of schooling should attend to their concerns.

The structure of Framework consists of the principles, essential learning areas and skills, attitudes and values, assessment, and the structure to be followed in the development of national curriculum statements.

Rather than consider each of the nine principles, I will focus only on the two premises which are said to form their basis:

• the individual student is at the centre of all teaching and learning; and

• the curriculum for all students will be of the highest quality.

The first premise is reflected in numerous references in the principles about the need to "enable" and "empower" students and to "respond" to each student's learning needs. The premise is, of course, grossly inflated. As I have pointed out elsewhere:

As for focusing on individual student needs, I have pointed out that:

The logical conclusion of the emphases on individual students and their individual needs is highly individualised curricula, an idea which sits uncomfortably with a national curriculum which aims to set "national directions" and "consistency in classroom programmes" (Framework p. 3).

This concentration on the individual student may have encouraged the authors of the new science curriculum (Ministry of Education 1993b, p. 10) to make the extraordinary statement that science learning is enhanced:

Science is certainly built on the shoulders of the giants who have gone before, but our new science curriculum appears to be saying that it is built on the shoulders of all. One of the striking things about scientific endeavour is that it requires the scientist to forgo the comfort of previous ideas and beliefs in a single-minded, humble pursuit of the truth about the world which, when found, may disappoint, or embarrass and confound those existing "ideas and beliefs". Further, as Kelly (1995) has pointed out, "[extending constructivist research on learning] into an educational ideology that perceives the concept of social-construction as more important than that of scientific rationality can seriously undermine both effective learning and the transmission of a valid portrayal of science."

The principles descend to the absurd when, for example, the school curriculum is required to "respect ... the values of all students" – a requirement for moral relativism which is, in any case, contrary to insistence elsewhere in Framework (p. 21) that particular 'values' such as honesty and reliability be reinforced.

We are not told explicitly the criteria by which we should recognise "highest quality" in the curriculum, but presumably they include being "gender-inclusive, non-racist, and non-discriminatory, ... " and having an substantial element of biculturalism and multiculturalism. Much of this is, I think, mistaken at best and, at worst, encourages the wrong sort of education – one that seeks to inculcate certain views rather than give students the knowledge and concepts with which to arrive at their own opinions. The required emphases may, for example, discourage critical engagement with historical accounts involving Maori and women in New Zealand society. They reflect current politically correct emphases which, in their present form, may well not prove durable.

What is not included in the principles is, perhaps, even more remarkable than what is. For example, we find no clear reference to learning that is desirable in its own right quite irrespective of the felt needs of society, the economy or the realisation of social ideals. This is a quite astonishing and deplorable omission in a national curriculum.

Again there is no reference to wisdom. In a secular state school the beginning of wisdom is not, I suppose, to be found in "the fear of the Lord" (Proverbs 1:7) but, as T. S. Eliot observed, it would be a pity if we overlooked the possibilities of education as a means of acquiring it (Eliot 1962, p. 99). These possibilities include the transmission of the riches of our western cultural inheritance and opening up to each new generation the thoughts of the great minds of the past as they wrestled with the tensions, ambiguities and uncertainties of the human predicament. An exposure to such works would help pupils to develop powers of discrimination – not in crass racial, gender or ethnic terms but as between good and evil, the noble and the ugly, the eternal and the ephemeral, truth and propaganda, and so on (Irwin 1994c).

The premises and principles do not, in my view, constitute a sound prescription for a durable curriculum framework. In seeking to 'be all things to all people' they confirm the legitimacy of the expectations that press in on schools from every side. Rather than riding out short-term fluctuations in intellectual fashions they are in danger of being submerged by them. On this second point, A. E. Housman warned us of :

We do not know why Framework discusses content in terms of learning areas rather than subjects or why the seven chosen are considered the best ones for a national curriculum. In fact Framework adopts a threefold approach of learning areas, subjects (subjects may contribute to learning areas) and, in the case of technology (a learning area which "has application to all subjects of the curriculum" p. 12), a cross-curricular approach.

The main advantage I can see in learning areas is that they might assist in ensuring breadth in the curriculum. But, even if this were to be a decisive argument in favour of them, why were the particular seven areas chosen? Why not, for example, 'communication', 'analytics', 'aesthetics' and 'ethics'? Indeed, why not a modern version of the medieval trivium and the quadrivium, as that remarkable woman Dorothy Sayers (Sayers 1948) once advocated for schools? Obviously there has to be some way of breaking down and organising the school curriculum and the essential learning areas approach may be as good as any other as a first stage. In practice, most learning areas collapse into subjects, notwithstanding rhetoric to the contrary in Framework.

Pupils are required to take a "broad and balanced" (or "balanced and broad") education in their first ten years, which means taking courses within all seven areas (pp. 8–9). In the final three years the curriculum is only to be "balanced", though a "broad and balanced" education is still to be available and this is, I think, a sensible solution. In year 11 "breadth" seems to mean that pupils are to take six subjects, and here we do find a mandatory core of English or Maori, mathematics and a science subject. Education in years 12 to 13 may be in "greater depth", but it is unclear what 'depth' and 'balanced' means for these years or even whether the two concepts are compatible. In fact it is not entirely clear what any of these concepts mean in practice. Given also the vagueness of the description of the learning areas and the reference to integrated, topical and thematic approaches (p. 8), 'balance' and 'breadth' would seem to allow a wide range of interpretation.

But, 'balance', 'breadth' and 'depth' are not the only concepts of importance. It is also necessary to consider the time to be given to each of the learning areas at various stages. A major weakness in Framework is the lack of any indication of this, and its omission will lead to problems in implementation, especially those of an overcrowded curriculum (see Howson 1994, p. 4 ).

The descriptions of the individual learning areas (pp. 10–16) are a mixture of the useful, the obvious, the unclear and the unhelpful. Problems with these descriptions have been carried through to the curriculum statements. I will just give examples from three learning areas.

In language, Framework requires that, in "selecting authors and texts, schools will have regard to gender balance and to the inclusion of a range of cultural perspectives." We find this concept of gender balance in the choice of materials in the English and social studies curricula. Education Forum submissions have pointed out that:

Attempts to define technology in curricular terms have been fraught with enormous problems in England and Wales, and the same seems to be the case here. While everyone is clear that our lives are profoundly affected by technology and it is widely accepted that it should, therefore, be represented in the school curriculum, it has been far from clear how it should be defined and delivered. Its relationship with science needs to be clarified (see Jenkins 1994) and its scope kept within reasonable bounds. As it is, Framework's definition of technology seems too broad for the school curriculum and may have contributed to what appears to me to be an over-ambitious curriculum with an excess of strands whose scope stretches into wider territory, such as social anthropology, threatening the integrity and coherence of the 'subject' (see Education Forum 1994b, and Jenkins 1994).

Framework's definition of the social sciences has, in my view, prolonged the confusion about what comprises social studies and gives it a spurious respectability. Its definition of the social sciences refers to history, geography and economics and seems to infer that social studies is whatever does not fall within them, that is, "global issues", the environment, biculturalism, multiculturalism, social justice, values clarification, and the like (Irwin 1994b). The drafts of the social studies curriculum reflect this confusion and echo the 'political correctness' of Framework's principles. To the moral relativism already noted, we must now add the cultural relativism of the draft social studies statements. The Education Forum submission on the first draft expressed strong concern with, inter alia:

Too much of Framework appears to be aimed at social reconstruction of one sort or another. Take for example the requirement that "concern for social justice ... be fostered" (p. 14). Social justice these days appears to refer to government interventions in the welfare area, but whether they are just or constitute justice is another matter entirely. A more profitable approach could be to test the concept of justice in a variety of situations and cultural contexts, so that students can pose questions and seek to answer them. They might conclude, for example, that the justice of social welfare benefits is far from self evident and that, to the extent that it breaks the link between cause and effect, it may undermine virtue (Minogue 1995) (but then virtue, like courtesy, is a concept that does not appear in Framework).

What we need, I suggest, is not an education that "fosters" a particular institutional arrangement, but the mental training that enables pupils to think through what might constitute justice and injustice, sense and nonsense, truth and propaganda, the beautiful and the ugly, and so on. As Bertrand Russell observed:

The eight groupings of essential skills have considerable prominence in Framework, and several of the subject curricula (for example, the statements for English, social studies, mathematics, and technology) assure the reader that they will provide opportunity for the development of several of these skills. In fact, the social studies curriculum (both the original and revised versions) categorises many modes of learning, including critical thinking, creativity and problem solving, as 'skills'.

Framework's treatment of 'skills' is naive and unhelpful in my view. In its usual basic sense, a skill implies a specific capacity which can be perfected through practice and exercise, such as juggling, throwing or dribbling a ball, neat handwriting, playing a note correctly, finding a place on a map given its latitude and longitude, and so on. There is certainly an important element of practice involved in critical thinking, creativity and other higher order modes of thinking, but referring to them as skills may be extremely misleading. At the very least skills of a mechanical and specific practice type need to be differentiated from capacities developed in very different ways. This lack of differentiation in the National Qualifications Framework is one of the more serious problems with that model.

The development of critical thinking requires sustained periods of reasoning that conforms to rules of logic and standards of excellence. These standards are not generic but are intrinsic to distinctive forms of knowledge. A developed capacity for critical thought in mathematics does not make one critically thoughtful as a historian or a literary critic, for example. There may be some transfer between forms of knowledge, and studies in formal logic, deduction and induction may be of some value. However, in general, students do not acquire critical thought in one form of knowledge by applying generic skills developed in other activities, but rather through in-depth and systematic studies within that form of knowledge (see Education Forum 1996).

In one short passage of just over a page (pp. 22–23) Framework lays down the structure for curriculum statements consisting of strands, aims and objectives. A large number of issues is involved, and the following discussion of them is necessarily brief.

First, the same structure is to apply to all statements. This one-structure-fits-all approach is highly problematic. The dangers include those of dividing what should be kept together and homogenising what should be kept separate. There has been a tendency to invent unnecessary strands, for example the curious 'visual language' strand in the English curriculum (Education Forum 1994a). As already noted, the technology curriculum arguably has an excess of strands or substrands (Education Forum 1994b). In any case, surely the educationally correct approach is to consider the material to be delivered and then to work out how it might best be structured in curriculum terms.

Second, the reduction of strands into achievement aims and achievement objectives presents again the potential problems of unnecessary and unhelpful division and homogenisation which can undermine intellectual coherence. The danger, as I see it, lies more in unnecessary division. On this point J H Newman wrote:

Moreover, these curriculum statements are to "specify clear learning outcomes against which students' achievements can be assessed" (p. 5, emphasis added). Of course we should endeavour to be as clear as possible ex ante about what schooling aims to achieve and to assess ex post what it has achieved. But if 'learning outcomes' are to be so clearly defined that pupils, teachers and 'third parties' can all understand them at a glance, then curriculum documents in any subject will have to be reduced to small fragments, each in itself trivial The assumption in this competency-based approach that we can precisely predetermine educational outcomes for assessment purposes also bedevils the qualifications framework.

Third, the statements are to cover all learning. There is no distinction between what might be considered 'core' and what might be considered optional. The lack of assistance in this matter compounds the potential for curriculum overload.

Fourth, the objectives in all curricula are to be set out in a number of levels, usually eight, to indicate progression and continuity from year 1 to year 13. Important issues are involved here including how to order material in which there may not be a natural hierarchy of complexity or difficulty. The curricula are to go right through to school exit. Why should this be necessary when school exit examinations will determine senior school curricula? UK authorities found their 10 level scale unnecessarily complex and prescriptive, and discontinued its use beyond year 9. And why levels and not stages or ages? We do not know. And why eight levels? Eight seems far too few to provide motivation to students and information to parents, schools and teachers. But then more levels would make the structure even more complex – there are problems in both directions. And why no curricular differentiation – there being only one curricular pathway in each subject for all students? Should the curriculum for mathematics, for example, be the same for all students whether they are going to leave school at 16 or going on to read maths at university (Howson 1994, pp. 11–12)? My own view is that the lack of provision for curricular differentiation is a major weakness in Framework.

These and other issues (including the important issue of pedagogy) have been raised and discussed at greater length in various Education Forum reports (see bibliography). The point I wish to stress here is that Framework assumes answers to a great many issues which do not appear to have been fully and explicitly analysed.

The duty of any critic is to outline an alternative approach. Such an approach is discussed at some length in a report for the Education Forum in 1994 (Irwin 1994c).

I do not believe that there is any 'one best' curriculum structure – inevitably there are trade-offs to be made. The optimal structure may vary between countries. Some countries which appear to achieve high educational standards have very prescriptive curricula while others also appear to do well with minimal central direction. What we in New Zealand have to do is work through the complex issues and make the best judgment we can about where the optimal solution for us lies.

My own view is that the optimal solution for New Zealand schooling at all levels is much more limited in scope than the one we now have. It would involve inter alia:

In my view, New Zealand missed a great opportunity between 1991 and 1993 to construct an educationally sound, flexible curriculum framework. We did not do so for various reasons, including political requirements that may have been unrealistic in educational and timing terms, weaknesses in a ministry of education that was understaffed (it lost much of its curriculum expertise in various restructurings) and overloaded with work, and the lack of an in-depth contribution from the teaching profession that was reeling from the Picot and other reforms and lacked (and still lacks) its own professional body with a capacity for independent quality research.

As it is, we have a poorly constructed framework which has contributed to many of the unsatisfactory aspects of the curriculum statements. Two related emphases are particularly disturbing: the emphasis on teaching children what to think and not how to think, and the use of schooling to serve external purposes such as social reconstruction. Dorothy Sayers wrote in what would now be politically incorrect language:

By this test, significant parts of what is advocated in Framework and related documents will be "effort spent in vain". I know many schools and teachers will reject these emphases, but it is highly disturbing that we should find them in official documents. They are most conspicuous in the social studies proposals and in the English curriculum. It is to be hoped that these points are made in submissions on the revised draft of the social studies curriculum statement.

I have argued elsewhere (Irwin 1996) that we have a strange mixture in education of, on the one hand, moral relativism which requires the suspension of judgment and, on the other hand, moral passion which demands acceptance of particular judgments and denounces those who question them as dishonest or worse. It is what Michael Polanyi called "moral inversion" (Polanyi 1958, pp. 232ff), and it comes about when moral passion is uprooted from any authoritative external ground and is hence less open to critical philosophical analysis (Torrance 1975). These "homeless moral passions" (Polanyi, ibid.) carry with them a strong sense of righteousness and moral superiority, evident in passionate judgments against social evils, including racism and sexism.

This moral passion requires a political power base if it is to exert force and achieve its ends. In the education area it is the lever of the national curriculum that, if captured, can mostly easily exert that force, which is why it is important that this lever is handled with great wisdom. I hope it will be apparent enough that I am not arguing that any curriculum should endorse sexism or racism. On the contrary, concern for justice and for the removal or diminution of sexual or racial discrimination are proper causes. My concern is that when such causes become detached from external reference points, such as the concepts of truth and intrinsic worth (the religious among us would say transcendent moral obligation), they can lead to distortions and indoctrination.

The last five years of curricular development have provided much from which we should learn. In my view, we should revisit, reassess and reconstruct Framework in the light of that experience. A national education curriculum is too important a matter to be left in an unsatisfactory state. The Education Forum has provided a substantial and challenging analytical contribution to such an exercise in the form of its various reports and submissions. I would like to think the teaching profession (or groups within it) will also take up the challenge, come to its own considered opinion, publish it and make representations to the educational authorities in line with its analysis. This is, I believe, essential for public schooling in a participatory democracy.

I acknowledge with thanks the many helpful comments on an earlier draft of this paper by Greg Lee, Reg Lockstone, Roger Kerr and Tim McMahon. However, responsibility for the views expressed remains my own.

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This paper focuses on the economic effects of a compulsory savings scheme. It looks first at some of the economic relationships between savings, economic growth and national sovereignty. Section 3 presents empirical evidence on savings performance in New Zealand and some countries with compulsory savings schemes. Section 4 considers some policy issues from the perspective of the business sector, including the financial services industry, and section 5 makes some concluding comments. An annex contains some more detailed material on these issues.

Material standards of living, including in retirement, are basically dependent on consumption opportunities. Consumption is the end-purpose of economic activity; it is the aggregate we want to maximise. Savings is deferred consumption; it is simply a means to an end. We save in order to spread consumption over time or to increase consumption in the future through profitable investments. The sustainable consumption opportunities of the community, including people in retirement, are essentially determined by the productivity and growth performance of the economy.

Fifty years ago economists were concerned about excessive saving – the so-called Keynesian problem of under-consumption. Today some people fret about countries saving too little. In fact, excessive savings and investment are as damaging to welfare (consumption possibilities) as the reverse. A successful effort to raise national savings and investment ratios might have little effect on the rate of economic growth. A basic growth model suggests the sustainable growth rate would not be altered. Instead there would be a one-off increase in per capita income. At the same time consumption per head could fall because of the greater burden of capital depreciation. Policies for growth need to be broadly based.

National savings comprise savings by households, firms and governments. Firms and governments have no money of their own: their assets and liabilities are owned by individuals. Given people's consumption plans, it is plausible that changes in one component of savings would be offset to some extent by changes in others. Furthermore, attempts to increase one form of household savings (retirement savings) by regulation would be likely to result in reductions in other forms of household savings (for example, home ownership). Most economists believe the main influence the government can exert on national savings is through its own savings or dissavings (operating surpluses or deficits). Taxes and welfare policies may be additional influences.

If domestic savings are lower than domestic investment, the result by definition is a current account deficit and, if maintained over time, an increase in both foreign liabilities and domestic assets to service them. There is nothing untoward about this situation if overall policy settings are sound. Nor is there any automatic relationship between domestic savings and the current account balance. As shown in the annex, higher domestic savings could be offset by changes in investment or net imports which would leave the current account position unchanged. Any problem of external indebtedness is best addressed by sound stabilisation (monetary and fiscal) policies and microeconomic reforms to improve international competitiveness. The net stock of claims by foreigners on New Zealand can only be reduced by running current account surpluses, not by restrictions on asset sales or foreign investment. Economic sovereignty is primarily a matter of whether a country's overall economic framework is sound and robust, and its economy flexible and competitive.

The answer to this question is straightforward. Central planners do not have the information to know. Instead it is the level that emerges if households are free to divide their income between current and future consumption in accordance with their own preferences in a relatively undistorted economic environment, free of inflation and fiscal imbalances. It is likely to be futile, if not counter-productive, for governments to try to interfere with the sum of the decisions of all the units making up the community as they go about their affairs.

As theory suggests, there is no close relationship between national savings (and investment) ratios and economic performance. The US savings ratio has been low for many decades. The savings ratios in the former Eastern bloc countries were among the highest in the world. The theory was that 'primitive socialist accumulation' would enable them to pay for rapid industrialisation in the absence of foreign capital and allow the Soviet Union to overtake the West. New Zealand's savings and investment ratios have been around or above the Organisation for Economic Cooperation and Development (OECD) averages but until recently our growth rate has been the lowest in the OECD area. Clearly other factors, including the efficiency of savings and investment, are more important determinants of economic growth.

Moreover, studies suggest that the causal connection between savings and growth may not run in the direction that is commonly supposed. The World Bank in its report The East Asian Miracle concluded that "growth drives savings rather than the other way around". In a separate examination of four Asian countries, other researchers came up with a fairly unambiguous finding: "In all four countries [Japan, South Korea, Singapore and Hong Kong] growth was high early and savings was high later". In South Korea, for example, growth averaged 6.1 percent during the period 1960–74 while the average savings rate was only 10.4 percent. In the subsequent period, 1977–87, savings averaged 27.8 percent and growth only 5.3 percent.

Some of the economic relationships considered thus far can be studied for three countries that have adopted compulsory savings schemes.

Australia has had a compulsory superannuation scheme since the early 1990s. Despite this, household savings have been falling steadily and are now less than 3 percent of disposable income. The national savings rate has fallen too: at 16.7 percent of gross domestic product (GDP) in 1994, it was well below the average for the first half of the 1980s. New Zealand's savings rate in 1994 was 20.4 percent, nearly four percentage points higher than Australia's. What has clearly happened in Australia is that there has been a massive switch in savings into superannuation and life insurance and away from forms such as repayment of home mortgages, but no increase in the total. Moreover, compulsory saving has not prevented large current account deficits and a build-up of external debt.

Chile introduced a compulsory savings scheme against a background of astronomical rates of inflation, a collapse of private savings and an inadequate and unaffordable public safety net. Its domestic savings rate has risen from under 5 percent to around 25 percent. However, contrary to the common belief about the effects of pension reform, empirical research suggests that its contribution to private saving was small or even negative. The important contributions to Chile's higher savings rate appear to be the increase in disposable income with economic growth and the increase in public saving resulting from sounder fiscal policies.

Similar evidence exists for Singapore. Its Central Provident Fund (CPF) was established in 1955, and Singapore has had one of the highest savings rates in the world. However, while the CPF may have been a factor in Singapore's rising savings rate until the early 1980s, recent research suggests that the more important explanations are demographic factors, the rapid growth of private disposable income and the high level of budgetary saving. Withdrawals are allowed from the CPF for a range of purposes. Only 15.9 percent of withdrawals are at age 55 (the age at which funds may be withdrawn for retirement purposes), and housing investments account for the bulk (66.6 percent) of the withdrawals. CPF saving is clearly highly substitutable for voluntary private saving, and there appears in recent years to have been a full offset between CPF and non-CPF saving.

Because compulsory savings schemes do little or nothing to increase overall national savings, they cannot make any significant contribution to economic growth even if there were a positive and causal link between total national savings and growth. Moreover, such schemes clearly distort savings and investment patterns in a number of ways, and are therefore likely to have negative effects on growth, and on welfare more generally. The interests of the business sector are in the development of a dynamic economy with increasing output and incomes per capita. These interests are the same as those of the retired elderly, who require access to a growing volume of real goods and services as their numbers increase. Interventionist policies such as compulsory savings reduce economic growth.

In order to reduce administrative complexities and lock-in savings until retirement, approved forms of compulsory savings have to be confined to a relatively narrow range of institutions, principally superannuation funds, life offices and banks. Investments in small businesses, farms and property, for example, are unlikely to be approved. Large superannuation funds are able to invest in major publicly listed companies, whose access to capital may therefore be improved with a compulsory regime, but they find it difficult to cope with the transactions costs of investments in small businesses, farms or direct property. Capital raising in these cases, and others such as venture capital, would be likely to become more difficult. Compulsory savings would almost certainly lead to pressures to re-regulate the financial sector, resulting in higher costs for all raisers of capital.

At first sight a compulsory savings scheme might be thought to benefit approved financial institutions by channelling a higher proportion of national savings through them, although it would disadvantage other financial intermediaries. However, providers of retirement income products are likely to experience significant growth in any case given the growing recognition of the need for private provision. Moreover, a reduction in economic growth under a compulsory scheme might reduce the volume of savings attracted by such institutions despite their higher market share. They would also be subject to the costs of increased regulation, high levels of transfers between schemes, a good deal of marginally profitable or unprofitable business, and frequent changes to the rules of the scheme. The last are inevitable with changing economic and political circumstances – some 2,000 changes to Australia's scheme have been reported since its inception. Changes in tax rates and inflation also affect scheme costs and benefits. Future governments could not be relied upon to maintain a hands-off attitude to fund investments – the proportion invested overseas, for example, could well become a political issue. There would also be political pressures to depart from an actuarially fair basis for provisions such as annuities, which would have no justification on commercial or efficiency grounds. All these factors would create an uncertain environment both for savers and institutions, contrary to the intentions of the policy.

The analysis in this paper suggests that proposals for compulsory superannuation to pursue the goals of national savings, sovereignty, economic growth and retirement income provision are misconceived. New Zealand does not have a savings problem by OECD standards. The environment for savings has been improved substantially in recent years with lower inflation, deregulation of the financial system, lower income taxes and the introduction of goods and services tax, moves towards a more restricted welfare safety net, and an end to public sector dissavings. These moves should be maintained or extended: the government's proposals to increase spending, reduce the need for self-provision of health, education and retirement income savings, and reduce its own savings are moves in the wrong direction. Similarly, it is surely egregious in itself and of dubious efficacy in terms of providing security in retirement to take away or reduce people's freedom to apply their savings to such purposes as:

Instead of a narrow focus on savings, the focus of retirement income policies should be on economic growth. As one study put it:

There are no grounds for arguing that the present public safety net is 'unsustainable'. The available studies indicate that it would require only quite modest increases in tax rates to sustain it even in the long term. Moreover, what matters for sustainability is not the increase in the proportion of elderly in the population but its relationship to the productivity of the economy. The central scenario of the New Zealand Institute of Economic Research's (NZIER) 1995 assessment was based on the conservative assumption of a long-term growth rate of 1.8 percent per annum. This is far below the medium-term growth rates – of 3.5–5 percent in the case of National and 6 percent in the case of New Zealand First – targeted by the coalition government. In the long term, the economy ought to have the potential to achieve an annual growth rate considerably higher than that assumed by the NZIER, given sound policies. Those calling the present scheme unsustainable seem to lack confidence in the country's future economic management.

Of course to argue that the present safety net is sustainable is not the same as arguing that the current policies are the best possible ones. A good case can be made, for example, for allowing the eligibility age to rise as life expectancy increases, for the adoption of targeting on Australian lines and for aligning the rate to the lower level of other long-term benefits for a future cohort of retirees, as the Royal Commission on Social Policy recommended. Similarly, private superannuation planning would be encouraged by general growth-oriented policies including reductions to income tax rates, which would reduce the current tax bias against savings and towards tax-favoured investments such as home ownership and higher education. Such policies should be pursued in the period ahead, within the framework of the 1993 Accord on Retirement Income Policies, if the September referendum on compulsory superannuation fails.

Similar rhetoric can be encountered almost every day – rhetoric that associates individualism with selfishness, and community with altruism. Yet these associations are wholly misconceived. Individualism and community are not opposites or mutually inconsistent. We are not forced to choose one at the expense of the other. As Alexis de Tocqueville observed, in democracies "all become powerless if they do not learn to help one another voluntarily". Moreover, a society in which individuals have a high degree of economic freedom actually strengthens social cohesion and gives a freer rein to altruism.

Thus the first point to make is that the individualism/community distinction is unhelpful. Rather, individualism is to be contrasted with collectivism, and it is attacked by those who espouse collectivism in its various guises – from the early socialists 150 years ago to the so-called communitarian movement today. For much of the 20th century, communists and social democrats (and even some who called themselves conservatives) shared the belief that socialism was the wave of the future. They thought capitalist competition was fatally undermined by inefficiencies and unacceptable inequities, and would eventually succumb to the demand for a just, rational, planned economic order. While that view was never soundly based in experience, over the last 20 years it has been decisively refuted by events. Not only did full-blown communism prove unsustainable, but the promise of 'social democracy' in western countries went sour with the combination of slow growth, high inflation and rising unemployment.

By contrast, increasing economic freedom has produced spectacular growth in many developing countries in Asia, Latin America and now even Eastern Europe, and the 21st century could usher in the widest spread of market-based prosperity that the world has ever seen. Yet at least in western countries like New Zealand, this success has still not put beyond question the legitimacy of the free enterprise system among intellectuals and commentators. Many are still captivated by the socialist dream, even though in practice it repeatedly turned out to be a nightmare. They lament that we seem to be stuck with a system which they regard as morally inferior to socialism, and which can at best merely be tamed and modified by government intervention. If capitalism is to be allowed a material victory among such people, it is certainly to be denied a moral one: the profit motive remains as disreputable in their eyes as ever. We will no doubt continue to hear complaints about 'the law of the jungle', 'the pursuit of profit', 'cogs in machines' and 'atomised individualism' from academics, clergy and other commentators.

But stubbornly, much human behaviour will remain as 'individualistic' as ever. It is ironic that those who denounce individualism and espouse collectivism nevertheless behave in their own economic lives just like individuals who support markets. They sell their houses to the highest bidders, snap up bargains when the opportunity arises and, I dare say, lawfully minimise their tax liabilities. Being known to oppose capitalism may be a fairly reliable indicator of the way some people vote, or whether they work in the state or private sector, but it is no indicator of their personal behaviour.

Under collectivism, the major decisions about the economy and society are taken by central institutions, normally the state. In a market economy, which allows individual freedom, those decisions are largely left to individuals to make for themselves. Every society contains some mixture of collectivism and individualism. No modern society is without a state, just as none lacks at least a small sphere of individual initiative, expressed in markets and other kinds of voluntary action.

At a deeper level, Christianity is also about the relation of the individual to God, and to other human beings. Collectivist regimes like the Soviet Union did their utmost to suppress such relationships. Their counterparts today are the oppressive regimes of Iran, Iraq, Libya, Myanmar, Cuba and the like. These are the societies in which people are indeed treated as 'productive units' or 'cogs in a machine', and less authoritarian collectivist regimes are just variations on this theme. Church leaders like the Melbourne archbishop have comprehensively lost the plot.

Over the last 20 years economic policy changes in almost every corner of the world have seen a major expansion of the individual sphere at the expense of the collective. This counter-revolution has brought large benefits, but they are not confined to economic efficiency as narrowly understood. More fundamental moral considerations are also at stake. Market liberals welcome the expansion of the individual sphere as enhancing freedom and the scope for moral behaviour; collectivists regret the greater scope they think this has given to the forces of selfishness, at the expense of community.

Are the collectivists right? Does an expansion of economic freedom bring with it, as they argue, an abandonment of 'compassion' and 'solidarity' in favour of a 'dog-eat-dog' society? Is this a price we may have to pay if we want to preserve or increase our living standards? I think not; indeed I will argue that the consequences are quite the reverse.

Plato's view seems fundamentally illogical: a society, in the end, is composed of individuals. Popper interpreted Plato's misconception as a throwback to a prehistoric tribal morality that emerged at a time when survival did require individuals to subordinate their private interests to those of the group. He went on to explain modern collectivism – with some plausibility – as an attempt to recreate tribal morality. Some people long for a certainty and order that they feel is missing in today's world. At bottom it is a longing to avoid the burden of civilisation. But the benefits of civilisation are possible only if individuals accept a large degree of individual responsibility for their own lives.

For Popper, 'class egoism' is evidence that collectivism does not equate with altruism. But a more striking example is nationalism. Though widely condemned today, nationalism is the most popular form that collectivism has ever taken, and the one that has inspired, for better or worse, immense individual sacrifice.

There is a tendency to regard nationalism, and its extreme manifestations in fascism and Nazism, as polar opposites to communism – on the right rather than the left of the political spectrum. Yet the Nazis called themselves national socialists for good reason. Anti-individualist sentiments predominated in Germany in the years after World War I. Nazis, communists and social democrats were locked in a ferocious struggle over which of them would inherit the collectivist mantle. Hitler understood this: the Nazi flag was red, in brazen imitation of the communist flag, though with a swastika on it. After the Nazis came to power in 1933, thousands of ex-communists flocked to join the party. Hitler even arranged special positions for them, since they had been usefully trained in totalitarian techniques.

Our revulsion at the Nazi period of German history has often led us to forget that German collectivism in the late 19th and early 20th centuries had great international popularity and influence. The forms of social insurance that New Zealand and Australia adopted at the turn of the 20th century, and Britain a few years later, were inspired by measures introduced in the 1880s by the German chancellor Bismarck. The only other place where their industrial relations systems were adopted was the Weimar Republic. The Nazis continued this tradition. In 1920, they adopted a programme calling for major extensions of the welfare state, summarised in the slogan "The common good before the individual good." They stood for what they called a Volksgemeinschaft, a 'people's community'.

Most people would concede that collectivism is not automatically good, and that some of its manifestations like the Nazi regime led to monstrous evil. But surely, they would argue, the collectivism of the modern, social democratic state, where governments are subject to electoral dismissal, is a different matter? Does not the modern welfare state embody our collective altruistic determination to aid the sick, the disabled and the needy? To a degree it does: most of us would agree that there is a case for financing a social safety net out of taxation. But other motives are also at play.

After all, most welfare state spending goes to people who do not strictly need it. Much goes straight back to people who paid the taxes to finance it in the first place. Huge sums of money are now politically at stake as resources flow to various interest groups. The battles that are fought out as each interest group tries to grab a larger slice of the cake, while shifting the costs on to other groups, are the reverse of what we should call altruism. If collectivism is so unselfish, why are superannuitants, nurses, teachers and other such groups not offering to take cuts in income? The truth is that the gathering fiscal crisis of the welfare state in most western countries cannot be blamed on excessive spending on the disadvantaged. Rather, it reflects the never-ending pressure for more spending on services like education, health care and age pensions – all stoutly defended by the champions of their beneficiaries as they jostle and compete with one another for the spoils.

The lesson to be drawn is that collectivism is fundamentally just one way of doing things. Collective action by the state is needed to ensure the provision of a sound legal system, genuine public goods and a social safety net. Thus for the foreseeable future services such as defence, law and order and some infrastructure will continue to be delivered and paid for collectively. Collectivism can be driven by any of a wide range of motives, worthy or otherwise. As a mechanism, its relative efficiency is open to objective investigation. By and large, it performs worse than methods that rely on individual initiative. This is the basis of the economic case for limited government.

To interpret this passage as condoning selfishness takes an effort of distortion that is quite impressive in its own way. Far from praising selfishness, Lady Thatcher was delivering a homily about the importance of consideration for others and denouncing people who try to shuffle their personal responsibilities to help others on to the state. Her message was very clear. Not only do individuals exist, but families and neighbours exist as well. People have obligations to look after their neighbours as well as their families. The goods and services that the state delivers collectively first have to be produced by individual effort. Unless people make some efforts of their own, there is little the state can do to help. All this seems eminently sensible. Moreover, as prime minister, Margaret Thatcher frequently affirmed there are positive roles that governments must play. And plainly there is 'society' in the sense of a cultural heritage or a national tradition which is a part of us all.

It is true that the language of individualism can often sound less morally uplifting than the language of collectivism. Collectivism speaks of cooperation, which can be taken to imply self-sacrifice in favour of the collective, although it seldom works out that way in practice – those in the party hierarchies have proven to be adept at exploiting the system. In contrast, the language of individualism incorporates the idea of 'self-interest'. 'Self-interest' is linguistically related to the word 'selfish', which has led to the two terms often being confused. In fact, self-interest and selfishness are two entirely different things. 'Self-interest' simply refers to individuals pursuing goals that they choose for themselves, rather than goals selected collectively. But these goals may be entirely unselfish, like the promotion of good causes. Just as collectivist methods may be put to evil purposes as well as good ones, so individuals can choose altruistic as well as selfish goals. The typical goal, I suggest, is not one's own welfare narrowly understood, but includes the welfare of one's immediate friends and family, with self-interest and family interest being particularly closely identified.

Markets have a moral advantage over collectivist systems, since market activity is based around the idea of voluntary cooperation in a way that political activity is not. In any market transaction, two or more parties choose to conduct an exchange in which all sides expect to be better off. We cooperate voluntarily with others when we buy a newspaper or a motor vehicle, enter into an employment contract, buy or rent a house, put money on deposit or take out a loan. A market economy is a vast network of voluntary cooperation among peoples, for mutual gain. By contrast, collective political action usually involves winners and losers, with the winners effectively coercing the losers.

Provided market exchanges are free of coercion or fraud, the pursuit of self-interest through markets also benefits others. Far from being selfish, self-interest in a market economy drives the entire system. It is in our interest to cooperate with others, and so we do. The most everyday and apparently simple product – a pencil, say – is designed, produced, transported and sold as a result of countless individual acts of cooperation amongst numerous people, most of whom have never met each other, all following their own self-interest. As Novak puts it, business is a community activity: "the modern business system expresses the interdependence of the whole human race." All this was fully understood by Adam Smith: he saw that economic freedom linked humanity in a great division of labour, kept together by an 'invisible hand' which usually led those following their own self-interest to indirectly serve the wider good.

Smith believed every man or woman had the capacity to sympathetically visualise other people's circumstances by putting themselves in their position. He saw every person's conscience as an 'impartial spectator' who judged his or her actions in terms of broader moral standards. He affirmed the virtues of prudence, beneficence and justice, and considered that society was possible only to the extent that these virtues were observed. All this is a world away from the crude caricature of Smith's thinking as 'atomised individualism' so often dredged up by opponents of markets.

Why does it seem so hard to get that point across? Partly, perhaps, because of a lack of imagination when it comes to markets. When we think of markets we might think of the stock exchange – an impersonal and largely faceless trading system. But we could just as well think of the fruit and vegetable markets of our cities, or the bazaars of Asia or the Middle East. These markets are surely driven by self-interest, but the prevailing atmosphere is one of harmony and cooperation, even – dare I say it – community.

Market exchanges are not normally characterised by deceit and distrust, but by mutual goodwill and cooperation. When we hand over 70 cents to a newspaper boy, we expect he will give us a newspaper. If he gives us the newspaper first, he expects we will hand over the money. Of course, we can be conned and betrayed, but such behaviour is not only morally wrong but doesn't usually pay. Thus as individual participants in a market economy, critics and supporters of markets alike are generally willing to extend to others the trust necessary for commerce to get going. This trust makes exchanges easier – just try to imagine the costs and inefficiencies in a world where buyers and sellers of newspapers could not trust each other – and it is a form of social capital which is largely self-sustaining. It is more easily eroded by the uncertainties generated by arbitrary government intervention than by the operation of the market.

But the deeper reason why markets are seen as selfish is that in modern times many have come to identify 'community' simply with the realm of politics. All human life outside politics is then seen as 'individualistic' in the sense of being asocial and solitary. Thus member of parliament Lianne Dalziel, for example, accuses the New Zealand Business Roundtable of talking only about personal and family responsibility, and never community responsibility. For the hard Left, community responsibility means political action and collectivism.

Yet this is completely wrong. The romantic idea of the community-state, in which politics governs every aspect of life, is a fatal conceit. By taking on excessive, intrusive powers, the collectivist state undermines or destroys local face-to-face associations. It replaces these horizonal links between 'individuals-in-community' with vertical links between the individual and the state. The results of this alienation are all too evident. The modern form of the collectivist state was born with the French Revolution and died with the collapse of the Soviet Union. It is not likely to be quickly resurrected.

The possibility of a civil society in which people forge their own social networks, without these networks having to fit a pattern imposed from above, is a very real one. Most people in their private lives belong to community associations, whether temporary or permanent, formal or informal. That is what David Green meant by the phrase 'community without politics' in his book From Welfare State to Civil Society. The citizens of a modern, free and open society need not be united around a common goal or enterprise. Within a common set of rules and standards, they can pursue their diverse private goals, which usually include a concern for the welfare of their fellow citizens.

At present, New Zealand would surely benefit from greater reliance on community without politics. Issues of major public concern, such as rising rates of crime and welfare dependency, and poor standards in education, are not being satisfactorily addressed by a political system which has assumed responsibility for them. Faced with politicians who have let them down, people tend to withdraw into private apathy, or find individual solutions that may be less than satisfactory. But most of our problems are the result of public action being monopolised by the political system, with the consequence that there is reduced scope for solutions generated by individual cooperation – whether through markets or non-market activity. The resources available to deal with public issues are commandeered by the government through taxation, leaving citizens with reduced ability to assume responsibility for those issues themselves.

On this analysis, the way to revive our public life is to transfer more responsibility from government back to individuals in society. If central and local governments started giving people back their taxes and rates they could play a larger and more fulfilling role in a genuine community. People might then find other ways to educate their children, for example, and to assist the voluntary associations that they think do a good job of helping the disadvantaged to become self-supporting. This sounds, and is, quite a challenge: a moral challenge to all of us to get more involved in our communities. It asks us to concentrate more on our individual responsibilities and less on our rights to taxpayer resources. The era of big government is over, and political provision is no longer a credible response to our present social problems. Not for the first time, Jim Anderton got it exactly backwards: the inherent 'winner-takes-all' divisiveness of politics must yield to a civil society of voluntary cooperation and engagement if we want to find genuine solutions.

Much of his criticism of US corporate welfare was valid. But it doesn't follow that the global economy is the plaything of an international conspiracy of giant multinational corporations. Indeed, Nader's attack on corporate imperialism is beginning to sound dated. Twenty years ago, Raymond Vernon, a Harvard academic, could write plausibly in Storm over the Multinationals that "the multinational enterprise has come to be seen as the embodiment of almost anything disconcerting about modern industrial society". Today the United Nations – no less – is in the business of advising governments on how to benefit from the capital, technology and employment opportunities that multinational companies can bring to the countries that attract them.

This shift of opinion among policymakers is part of the counter-revolution in economic policy that has swept the world over the last two decades. Later in this address I shall spell out the ways in which investment by multinational companies can help generate growth and prosperity, and the conditions under which countries can obtain these benefits without loss of national sovereignty. The heart of the issue at stake is the policy regime that allows countries like New Zealand to capture most successfully the benefits of the activities of multinational companies. If, and only if, we get this right can we be confident in saying that such companies are our servants and not our masters.

First, however, I want to explore the background to the beliefs expressed by Ralph Nader, since they still find support among opponents of New Zealand's policy revolution of the last dozen years, and also among members of the public who believe that multinational investment is automatically a process of 'selling off the farm'.

Multinational companies are hardly new. Before World War I, the international economy had achieved a degree of openness and integration that has been recovered only in recent years. After World War I, protectionism came into fashion, and faith in international capitalism was weakened by the Great Depression. Reflecting the influence of Marxist-Leninist ideas which were triumphant in the Soviet Union, foreign investment was widely disparaged as 'economic imperialism'.

Such ideas continued to evolve after World War II, and helped to keep capital markets under strict government control even as international trade was gradually liberalised under the GATT. In the 1950s and 1960s, some leading intellectuals produced a new version of the critique of capitalism that drew on the quasi-Marxist belief that competition was a self-defeating process that led spontaneously to the concentration of production into fewer and fewer hands and ultimately the replacement of competition and markets by monopoly. John K. Galbraith, for example in The New Industrial State, argued that supply and demand were reconciled, not by entrepreneurs and markets, but by a technical-managerial class, or the 'technostructure'. Management had seized control of giant corporations, marginalised the shareholders, and replaced the profit motive with an expansion motive. This it could do because it effectively controlled demand as well as supply. In the 1950s Galbraith had already argued in The Affluent Society, as had Vance Packard in The Hidden Persuaders, that commercial exchanges were not expressions of consumer sovereignty that guided entrepreneurs' productive decisions, but rather were expressions of the masses' enslavement by advertising, which generated the artificial wants that it suited the corporations to supply.

In the West, these beliefs encouraged corporatism, whereby governments sought to work with the 'technostructure' to ensure that the latter's interests coincided with the national interest. Galbraith's assertion that the management and the ownership of corporations had become separated had the effect of downplaying the distinction between the public and the private sectors, and sanctioned state ownership where it existed. In developing countries, Galbraith's analysis chimed well with the fashion of 'development economics', promoted internationally by organisations like the United Nations Conference on Trade and Development (UNCTAD), which encouraged governments to avoid multinational investment and instead to seek national self-sufficiency through import controls (to stimulate domestic industry) and commodity taxes (to fund investment).

The failure of 'think big' corporatism and of development economics scarcely needs to be rehearsed here. Giant corporations became notorious for sloth and rigidity, and were shown up by entrepreneurial firms that could respond quickly to changing consumer tastes. American corporations found themselves challenged by nimbler Japanese competitors. Developing countries, led by the Asian tigers, showed that low taxes along with openness to trade and foreign investment were a surer path to prosperity than self-sufficiency, which led only to stagnation and aid-dependency. They learned the wisdom of the aphorism of Professor Joan Robinson, the Cambridge University economist, that "if there's one thing worse than being exploited, it's not being exploited at all". Nowadays, multinational corporations thrive not on planning partnerships with governments but on market opportunities provided by an internationalised economy. Falling transport and communications costs, along with policy changes like the removal of barriers to foreign investment and the liberalisation of capital markets, have made it easier and less risky for companies to invest on a world scale, while the privatisation of state enterprises in many countries has provided additional opportunities for them to do so.

We should at least be grateful that Galbraith has been prepared to adjust his ideas to reality.

Still, it is important not to exaggerate the scale and significance of multinational enterprises. In the early 1980s, some observers thought that internationalisation would enable multinational corporations to take over the world, by enabling them to realise huge economies of scale. In practice, internationalisation has released entrepreneurial forces that are subjecting large multinationals themselves to competition, as technology erodes economies of scale and makes possible more customised goods and services. In 1993 The Economist estimated that the number of multinationals had grown at least fivefold during the two decades to 1993, and that the top 100 multinational companies accounted for between 40 and 50 percent of all cross-border assets. However, that represented only about 16 percent of the world's productive assets. And for all the talk of 'globalisation', almost every country funds the lion's share of its investment out of its own savings.

Similarly, there are very few multinational companies that are not deeply entrenched in their home countries: the idea of the pure multinational or non-national company floating in a kind of economic cyberspace remains something of a fantasy. So whereas Galbraith once believed that the free play of commercial forces favoured the concentration of economic power into ever fewer hands, experience suggests that the international economy accommodates a variety of processes – not just centralisation but decentralisation as well. If national sovereignty has appeared to become less effective, this reflects not so much the growing power of multinational companies as the increasing freedom of individuals, both as consumers and entrepreneurs.

According to Statistics New Zealand, in the year to 31 March 1995 the level of foreign investment in New Zealand rose by NZ$4.6 billion to $96.7 billion. Nearly all of this increase consisted of foreign direct investment, typically by multinational companies – purchases of real estate, acquisitions of existing firms, and the creation of new businesses. Foreign direct investment rose to a level of $40.3 billion in that year. The remaining investment consisted mainly of private portfolio investment (that is, equity participation in, and lending to, public and private enterprises).

New Zealand is a source of, as well as a host to, international investment, though on a much smaller scale. In the year to 31 March 1995, the stock of direct foreign investment originating in New Zealand rose by NZ$1.8 billion to $11.5 billion. Interestingly, given the debate over Asian investment, New Zealand has invested more in Asia over the last two years than Asians have invested in New Zealand. Yet New Zealand remains a net importer of capital by a wide margin, and about one-third of the workforce relies directly or indirectly for employment on firms that are at least partly foreign-owned. It is therefore vital that we understand, first, the very great actual and potential benefits that multinational companies can bestow on countries that attract their investments, and, second, how such countries can maximise and enjoy those benefits while remaining masters of their own fate.

There are two sides to every commercial transaction, and both sides benefit. If people sell off parts of the 'farm', it is because they see a net gain in doing so. Xenophobic restrictions on the level of foreign purchases of domestic assets impose costs in terms of forgone capital gains and, in the case of state assets, opportunities to further reduce public debt.

Another benefit that multinational companies can confer on their host countries is the promotion of trade. A large proportion of international trade occurs between multinational companies and between the different branches of such companies. This is especially true for trade in high technology products, which is growing fast and generates positive spillover effects. Commerce between multinational companies and domestic firms provides the latter with access to international trade networks and generally deepens a country's integration in the international economy, so helping it to discover and exploit more fully its comparative advantages.

A third benefit that multinational companies can bring is the strengthening of domestic competition. This is likely to be especially the case with small economies, many of whose markets may be dominated by one or a few suppliers. A striking example in New Zealand is the telecommunications market in which, before deregulation, Telecom Corporation enjoyed a virtual monopoly. Now several multinational telecommunications companies have entered the market. They are providing competition that would have been unlikely to emerge, at least in the short term, from New Zealand-owned companies because of a lack of financial muscle and technical expertise.

Of course, it is also possible for takeovers and mergers involving multinational companies to diminish domestic competition by reducing the number of producers in a market. However, in an open economy, mergers that reduce domestic competition may do little harm if the markets in which the companies operate remain exposed to international competition. This, in turn, depends crucially on the prevailing policy regime. If it is sound, the benefits that multinational companies can offer are unlikely to be offset by any harmful effects.

Multinational companies can also be sources of technological expertise. It is well established that technological progress is an important factor in economic growth. Multinational companies are a major transmission mechanism of such progress. Some technology is costly and requires substantial investment that only large companies, like multinational ones, can afford. As well, foreign direct investment is often the only way that multinational companies can fully exploit their investments in new technology, as they take advantage of, and bring together, various features of the global economy. The expertise that multinational companies transmit includes management techniques and work practices, which can be imitated by local firms and can help them to increase their productivity.

Many of these benefits are evident in the activities of what is perhaps the world's best known multinational company: McDonald's. McDonald's is a leading symbol of what is often casually referred to as the 'Americanisation' of the world. But one of the most remarkable things about McDonald's is how deeply enmeshed it is in its host economies. Its burgers are produced from local ingredients: in Russia it actually owns and runs the agribusinesses that supply its wheat and beef. Its franchise system transfers its successful management techniques to local populations. Its famous system of employing and training local teenage labour creates lasting benefits for its employees. The competition it provides for local rivals has greatly improved the latter's quality of service. It is no wonder that countries are so eager to be invaded by McDonald's.

Indeed, the international success of McDonald's has made it possible to test the early nineteenth century theory of international peace through trade. The modern version of the theory, propounded by Thomas Friedman of the New York Times, maintains that no country with a McDonald's has ever gone to war with another. So far, it has passed all tests. Friedman is reported to fear a backlash from poorer nations unable to benefit from the globalisation of the world economy: "They may feel that their traditional culture will be steamrollered by it and fear that they won't eat the Big Mac, the Big Mac will eat them." But for the present, the news is good: "Relations between Andorra and Hong Kong, Sweden and El Salvador, and Iceland and New Zealand have never been better".

The appropriate policy stance towards multinational companies is one that removes unwarranted obstacles to foreign direct investment and creates an environment in which those investments are most likely to succeed. Of course, such policies (competitive tax rates; adequate infrastructure, education and training; transparent, simple and competition-enhancing regulations; flexible labour markets; and a stable macroeconomy) remove unwarranted obstacles to, and enhance the prospects for, domestic investment as well. Like domestic investors, foreign investors should not have to demonstrate that their proposals are in the public interest: rather, the burden of proof should lie with those who argue that they are not.

On the other hand, special treatment for multinational companies is likely to be inefficient and welfare-reducing. And it is under such policies that multinational companies can become our masters. Take the link between foreign investment and import tariffs. Some companies become multinational as a way of avoiding the trade-reducing effects of tariffs: unable to export their goods to countries with high tariff barriers, they shift their production to them instead. Some governments implicitly use tariffs as a way of attracting foreign investment. But, once inside the gates, multinational corporations acquire a special interest in the maintenance in perpetuity of protective barriers and can loudly threaten to liquidate their investments unless their favoured treatment continues. If their lobbying is successful, the economic distortions reduce potential national income and damage consumer interests.

Fortunately, multilateral trade organisations like the World Trade Organisation and APEC have drawn up common codes of practice that help countries resist attempts by protected multinational companies to play countries off against each other by seeking to maximise special favours. International competition for foreign investment tends nowadays to be indirect and benign, as governments limit tax rates and commercial regulation and concentrate on public investment in education and infrastructure.

To summarise: if foreign investment is directly sought by concessions and favours, the patterns and levels of such investment could be inefficient and of little benefit to the receiving country. But where foreign investment is governed by a sound policy regime that applies in a neutral fashion across the whole economy, both foreign and domestic firms are disciplined by competition and resources tend to be used in ways that are of most value to the community.

These arguments may not impress people, including some politicians, who prefer to conceive of economic sovereignty as a game played by nation states in which any economic gain that accrues to one nation must come at the expense of others. To this way of thinking, the profit that a multinational company repatriates to its shareholders is self-evidently a loss to the host country. However, profit repatriated from New Zealand to, say, the United States, Taiwan, or Australia represents a loss to New Zealand only if it is inflated by protection or subsidy, or by special deals that exempt the company from the tax laws and other regulations that apply to domestic companies. Otherwise, repatriated profit is evidence that the investment has succeeded in generating wealth, of which the host country has obtained a share. Would anyone seriously argue that the country would be better off if its foreign investors systematically made losses?

Economists emphasise the case for maximising the freedom of firms and individuals to promote their own welfare through voluntary decisions and exchanges. Barriers to international trade and investment are restraints on that freedom, and when exchanges are possible across international borders, everyone benefits. Economists see no contradiction in principle between such economic freedoms and national sovereignty: sound policies can enhance both, not one at the expense of the other.

The economic nationalist, on the other hand, views such economic freedoms as a threat to national sovereignty. What counts for such a person is the ability of the nation to implement political decisions about its preferred pattern of economic development. Individual economic sovereignty would be all too likely to disrupt such decisions, and so is likely to be suppressed in the name of national sovereignty. Economic nationalist regimes do not necessarily eschew foreign investment altogether. Although they are likely to try to avoid foreign involvement by funding more of their investment from national savings, they are typically willing to allow foreign investors in as long as they agree to conform with government determined national priorities. In such cases, however, multinational companies may be put off from investing altogether, or become the beneficiaries of privileges organised by politicians. The trouble is that countries that go down this road are likely to end up poorer and weaker, and therefore to enjoy less true national sovereignty, than those that give priority to individual sovereignty and economic freedom.

We in New Zealand have learned from bitter experience that politically determined national priorities are all too likely to lead to projects that, by ignoring or suppressing market forces, reduce national wealth and increase national debt. Such countries lose international prestige, goodwill, and – by becoming indebted to foreign interests – control over their own destinies. New Zealand in 1984 was at the mercy of the international financial system: if the financial reforms had not been adopted as a matter of policy by the incoming Labour government, the adjustments would have been imposed brutally by the financial markets or the International Monetary Fund (IMF). Today, New Zealand has regained the sovereignty it was at risk of losing. As an economy with one of highest levels of economic freedom in the world, its attractiveness to overseas investors goes a long way to compensate for its small size and its vulnerability. It is an example of the way the free international market places nations on a truly equal footing by rendering irrelevant differences between them in terms of size and military might.

Thus the control of governments over the decisions of multinational companies is as powerful as it ever was. However, one thing is new: because the consequences of decisions on how these controls are used are more immediate and transparent, voters have much more control over governments. Why anyone would view this development as a threat to national sovereignty or democracy is difficult to understand.

The role and impact of multinational corporations, and the degree to which they can dictate outcomes to their advantage, have evolved with the changes that have occurred over the last 50 years in the prevailing economic policy regime. In the post-war decades, multinational companies enjoyed a profile and political significance that reflected policy makers' belief that the future lay with big organisations – in both the private sector and the public sector – that had outgrown market forces and could control their own commercial environments. The disappointing outcomes of this approach have served to show that 'bigness' confers no competitive advantage in itself.

We have consequently moved away from misconceived policies of corporatism and dirigisme to an understanding of the causes of the wealth of nations which tells us that multinational companies are, broadly speaking, as subject to market forces (and also to political forces) as other producers. They are important players, but not necessarily more important, for good or ill, than other economic entities that evolve spontaneously. We have learned that big is not necessarily best: consumers' interests are served simply by efficient businesses, and these vary enormously in size. Equally, our present understanding of public policy shows us how governments can promote (or, if they insist, undermine) the potential benefits of the international activities of businesses.

Imposing special burdens on multinational companies would risk scaring off foreign investment along with its potential benefits. By generating hostility between ourselves and our trading partners, with the possibility of retaliation, it would also diminish our economic and political sovereignty. Similarly, chasing the benefits of foreign investment with concessions like tax breaks and import protection would be self-defeating, would transfer wealth from New Zealand citizens to the shareholders of multinational companies, and would weaken our national sovereignty by encouraging multinational companies to play different countries off against each other in their search for favours.

New Zealand's present policy regime, which combines an openness to foreign investment with a predominantly market-led economy, less regulation and similar treatment of domestic and foreign investment, is ensuring that the activities of multinational companies in New Zealand generally deliver net benefits to New Zealanders. If we continue to follow these rules, multinational companies will be our servants and not our masters, and, in my view, we will have nothing to lose and everything to gain by welcoming them to New Zealand.

A market economy is often stigmatised as a dog-eat-dog world of selfishness, greed or general amorality. Often this criticism comes from people outside the market sector – such as university academics, public sector workers or various other parties with a claim on the government. And the criticism can be virulent: the stridency of some contemporary critics of markets fully matches the passion of Karl Marx's denunciation of nineteenth century capitalism. For instance, Professor Tim Hazledine of the University of Auckland advises us that the lessons of the post-1984 economic reforms are that "a system based on personal greed and the ruthless egotism of one-on-one competition is not only morally repulsive, it is also bad economics".

A first response to such an extraordinary charge might be to note a very curious asymmetry in the views of Hazledine, Jane Kelsey and the standout band of academic critics of New Zealand's economic reforms – an asymmetry that becomes more puzzling the more you think about it. When people in the private sector follow their own self-interest, they are labelled 'greedy' by such commentators. But when those with a vested interest in the public sector follow their self-interest, suddenly a different standard seems to apply.

Thus when teachers go on strike over a pay claim and children miss out on schooling, I have hardly ever heard the critics of markets describe teachers as greedy. Nor have I when public sector nurses do the same thing and get a pay rise which leaves less public money available for hip operations for needy superannuitants. Nor when university academics obtain a salary increase that pushes up student fees. Nor when tertiary students demonstrate in favour of higher taxpayer subsidies. Nor when firefighters promote a referendum to defend their feather-bedded conditions. Nor when the sons and daughters of well-off elderly people in long-term geriatric care lobby the government to remove asset tests, thus protecting the parental estate and their own future inheritance.

My purpose here is not to condemn all these examples of public sector activity, but to point to some obvious facts. All of the actions I have described are plainly self-interested, and, to the extent they are successful, various third parties are clearly the losers. So why is Professor Hazledine not falling over himself to label this public sector world of self-interested activity "morally repulsive"? After all, a member of the human race does not suddenly change into a member of a totally different and more morally elevated species by leaving the private sector for the public sector. Nor does the economic law of scarcity apply any less in the public sector than in the private sector. We cannot get something for nothing; there is no bottomless pit of resources, and when one group extracts more for itself from the public purse, someone else has to pay. Indeed, arguably the most pervasive form of greed today is that of people who seek to gain other people's money by electing politicians who will take it on their behalf.

Moreover, the alleged 'greed' in the private market economy actually compares very favourably with the self-interested behaviour one sees in much of the public sector. For, unlike organised self-interest in the public sector which ultimately depends on the government's coercive power to tax, the entire edifice of a market economy is founded on the idea of mutual gain. A market transaction – such as purchasing a loaf of bread or a house, taking out a bank loan or entering into a contract of employment – only takes place when both parties to the transaction expect to be better off as a result. Market exchange can take place on no other basis. A market economy is thus a huge network of cooperation, in which people are constantly making themselves mutually better off through trade with one another. People serving their fellow human beings through the provision of goods and services generate income.

The idea of mutual gain through voluntary exchange is one of those ideas which, once grasped, seems so powerful that one wonders why its significance was not recognised a lot earlier in history. For, historically speaking, the principles behind a market economy have begun to be soundly articulated only in comparatively recent times. The Greek philosopher Plato assigned a low ranking to commerce in his ideal state. Aristotle likewise tended to play down the significance of market exchange, since he saw merchants as merely exchanging what had already been produced. It was not until the verge of the industrial revolution in the late eighteenth century that Adam Smith published his classic book The Wealth of Nations, which described how the pursuit of profit through voluntary exchange was the social arrangement that maximised benefits to society as a whole.

In the decades following the publication of The Wealth of Nations, the wealth-creating potential of an economy based on market exchange under the rule of law was abundantly demonstrated. Entrepreneurs employing new technologies tapped new sources of energy, created and marketed new products, and developed whole new industries for a rapidly expanding population. Most of those who began this revolution came from modest backgrounds. Hardly any went to Oxford or Cambridge; they were not in any sense part of an establishment or an elite. By the light of today's anti-market critics they were displaying 'personal greed and ruthless egotism'. And it comes as no surprise to learn that, in Britain at least, these entrepreneurs were often attacked as 'greedy' by intellectuals and academics of their own time. Often enough they were seen as vulgar upstarts, the nouveau riche who were destroying the old paternal order through selfishness and avarice. But we owe a huge debt to them, because they helped get under way that rise in living standards which lifted millions out of grinding poverty to the levels of advanced countries today.

Like Britain, nineteenth century America also saw people of modest background and often limited education make technological breakthroughs and create businesses that spread wealth and changed radically the material conditions of ordinary people. These early American entrepreneurs were less frequently described as greedy than their British counterparts. From Andrew Carnegie to Bill Gates, the person who starts with nothing and makes a fortune has usually been viewed positively as the embodiment of the American dream – a fact which goes a long way towards explaining why America is one of the richest countries in the world today.

'Greed' does not explain why so many of these men turned to philanthropy, and why Andrew Carnegie progressively gave away his entire fortune. Nor does 'greed' explain the successful businessperson of today. In contrast to many with inherited wealth, most business executives do not live lives of ostentatious consumption or sybaritic luxury, like decadent Roman emperors or minor members of the royal family. Most top business executives continue to work long after they earned enough to satisfy any personal spending whims. It cannot be greed that drives such people. More likely it is the love of the job and its constant challenges.

Most of those who head New Zealand's largest companies are professional managers, not wealthy individuals in their own right. Yet there is a great deal of adverse comment on the salaries chief executives in New Zealand earn, even though they are typically far below those of their counterparts in many other countries. This criticism is surely quite misguided. Our best chief executives perform complex and demanding jobs which demand rare skills. They must understand complex financial and legal issues, the possibilities of new technologies and the shifting demands of consumers in the markets in which their companies are operating. They must be strategic thinkers yet have sufficient grasp of detail to handle day-to-day decision making. They must also have important people skills and the judgment needed to appoint the right people to the right positions within their organisations. And they must have the personality and leadership ability to inspire and motivate teams around them, to instil a corporate culture and a corporate spirit.

It is a difficult enough job finding a person who is outstanding in one or two of these roles. If someone can perform all of them to a high degree, that person has an extremely high value to shareholders. Just a single inspired decision by an outstanding chief executive can mean far more to a firm's future earnings than that person's total remuneration in a few years of service in a top position: the peak career years of chief executives, like those of leading sports people, are usually short in number. Competition amongst companies to attract such business talent means that rewards to these individuals will naturally be high.

The high rewards that the best managers can earn are in essence no different from the rewards of any other individual whose skills are greatly in demand in a competitive market – a Michael Jordan, Oprah Winfrey, Jonah Lomu or Kiri Te Kanawa, for example. The difference is that we do not know how much Jonah or Dame Kiri earns – rightly, because it is none of our business – whereas the government in its wisdom has seen fit to compel the disclosure of senior executive salaries. This makes the corporate sector a special focus for envy. And when one strips away the rhetoric in which complaints about top business salaries are couched, most come down, at bottom, to that unlovely sentiment.

Yet few things are more destructive of civil society than envy. It is the most sterile of passions and through much of history has set family against family, faction against faction and class against class. Market economies have absolutely no mortgage on the generation of envy. On the contrary: societies where the state tries to allocate rewards on the basis of what people are deemed to need or deserve – an impossible task – are natural breeding grounds for envy. The former Soviet Union was ridden with it. A joke has it that an Englishman, a Frenchman and a Russian were asked what would be their wish if they knew they had only one weekend to live. The Englishman said he would spend the time walking his dog in the woods. The Frenchman said he would spend it with his mistress in Paris. The Russian said he would like to watch his neighbour's barn burn down.

In Western countries most ordinary people (as opposed to intellectuals who purport to speak on their behalf) do not mind a society in which some earn more than others, or in which large differences of artistic, sporting and other natural talents exist. They are not compulsive equalisers. What they find harder to accept with equanimity is the sight of some doing well at others' expense, or a lack of opportunities to do well themselves. Consequently, resentment flourishes during periods of economic stagnation, or when people are denied arbitrarily the opportunity to exercise their talents. Their helplessness to improve their condition strikes them as unfair.

By contrast, during periods of economic growth people see their opportunities and prospects improving and are less inclined to complain that others are doing better. Because a market economy is easily the best vehicle for generating growth, it is the best economic system for combating envy. Moreover, by providing a vehicle for upward mobility, it combats envy in the most tangible way. People can see that in the course of time they and their children will be better off. They understand that hard work, thrift, investment in skills, honesty, reliability and all the other virtues that make a person valuable in a market economy, typically bring rewards to them and their families.

Some people still balk at the idea of endorsing a market economy because they see it as condoning selfishness or immoral behaviour. But that is to wholly misunderstand the market system. Markets are based not on selfishness but on self-interest. When Professor Hazledine buys a loaf of bread from the proprietor of his corner dairy, both parties are better off. Both have clearly acted in their own self-interest but it is hard to see how either could be described as acting 'selfishly'. A market economy is in essence that type of transaction repeated in millions of different circumstances. And the great majority of us – critics and supporters of markets alike – act in our own self-interest in economic matters. We budget, compare prices, snap up a bargain when we see one, and sell our labour to the highest bidder (other things, such as job satisfaction, being equal). Surely none of this is selfish, immoral or greedy.

To observe as a factual matter that people routinely act out of self-interest does not exhaust the question of how any of us should behave in all circumstances. The Scottish philosopher David Hume famously pointed out that you cannot derive an 'ought' statement (such as an ethical maxim) from a mere factual description of how things are. But in thinking about the best social institutions, we are well advised to take into account human nature, not as we might like it to be but as it has actually come to evolve in the real world. A social system such as a market economy, which enables people to pursue their self-interest through cooperating with others, fits human nature better than systems that assume no role for self-interest. Moreover, it helps reinforce moral values, since moral conduct is in the long run more in keeping with probabilities of success in business than immoral conduct. However, both the economy and society ultimately rely on moral foundations which are independent of any economic system.

Those who still find a market economy based on self-interest aesthetically unappealing should ask themselves this question: how would a different rule actually work better? Would it really be feasible to try constantly to maximise other people's interests, rather than our own? We know our own interests far better than we know other people's. How would we find out what other people's interests are, and how would we go about advancing them? And whose interests would we give priority to? The information and coordination problems in a world where some class – perhaps the intelligentsia or nomenclatura – is running everyone else's life are formidable compared to those of a market system. Of course a central planner can determine whose interests count, and how each of us is to go about satisfying them. But that is totalitarianism, and its record is not encouraging. Bertrand Russell once pointed out that much of what passes for socialism is usually disguised contempt for 'the lower orders', or disguised love of power.

A civil society inculcates values of self discipline, self reliance, community involvement and support for others – all independently of government. Altruism exists alongside self-interest. It is an obvious fact of human nature that most people empathise with others, and often go out of their way to help people in need. Sympathy for those in distress can be observed in even quite young children. Altruism is most powerful at close range. The closest range is the family: most people care more about other family members than about anyone else. This is why the family is such an important social institution and why it is mistaken to believe that the collective decision making and resource sharing that occurs in families is a sound basis for organising the wider society.

It is ironic that the critics who claim supporters of market economics ignore altruism include the very people who rushed to condemn the 1980s in America as 'a decade of greed'. For it is these critics who have left altruism out of the picture: it has been estimated that total charitable giving in America rose 56 percent in real terms in the course of that decade – faster than the increase in national wealth. With the worldwide move to freer markets, the 1980s were a decade in which large numbers of people became better off through participation in a market economy. Some people behaved greedily, as they do in every decade. But it takes a vivid imagination to label a whole decade one of 'greed'. In fact, far from inhibiting altruism, an increase in prosperity facilitates it. Wealth increases your options for helping others.

It is pointless to deny that greed exists. It is as well to admit that we are all capable of greed and sometimes are greedy. Yet the antidotes to greed are more powerful in a free and open society than in a managed society. Most of the misnamed 'entrepreneurs' of the 1980s were eventually exposed and punished, sometimes by the law but more often and sooner by the markets. Unpunished greed, in contrast, is possible only where politicians or bureaucrats become involved and disrupt those processes. Even today, nothing beats the rapaciousness of communist cadres in China or Vietnam, or well-connected gangster-businessmen in Russia or Italy.

Of course, no one should ever claim that markets work perfectly, and nor do governments. Winston Churchill once said that democracy is a bad system of government except compared to all the others. The same might be said of the market system. All human institutions are imperfect, because we are inherently finite, limited creatures – despite our undoubted ingenuity as a species. We are limited in knowledge and capacity, and any social mechanism we devise will have features that most of us would rather it did not. It is not a question of which arrangement solves all the world's problems, but which works best amongst the feasible alternatives. Nor is it a question of arguing for some system of unbridled laissez faire: there is a positive role for government to create the legal framework within which markets can function, ensure the provision of genuine public goods and provide a welfare safety net. But governments that intrude unduly on the economic freedoms on which a market system depends choke the system's wealth-creating capacity.

Those who are genuinely on the side of the poor must be on the side of business and the market system and reject the spurious criticisms of greed, selfishness and immorality levelled against them.