Sir Frank's next 20 years

Colin James’s comments to The Visible Hand symposium to mark Sir Frank Holmes’ policy contributions, Institute of Policy Studies, 19 November 2004

My brief is the future. Which is entirely appropriate in honour of a man who has always in my experience thought about the future. Sir Frank has one of the most inquiring and omnivorous minds I have met. Few 40-year-olds have his restlessness and his enthusiasm let alone his wisdom. In consequence, I have learnt a great deal from him.

He is by far the youngest 80-year-old I know. When Lady Nola turned 70, I expressed surprise to Sir Frank that he had married someone older than he. Sir Frank owned up to having married an older woman — but by six months or so, not the half-decade I had guessed. He carried — and carries — his age and his wisdom lightly.

There is a lot more left in the tank, I think. So I have devised a 20-year programme of work for Sir Frank.

I shall start with the economy, which is his discipline. Not being an economist myself — or at most a bush economist (small b) — I can state the core issue simply: how can a small, sparsely populated country at the end of the world make itself richer fast enough to close the gap in personal wealth with Australia and climb back up the world ladder?

This, of course, begs the question of what constitutes wealth. New Zealand is undoubtedly a wealthy country and offers to most of its citizens a lifestyle superior to that of more crowded and polluted countries that are nominally richer. I am thinking of access to open space and recreational opportunities, relative peace and harmony, improved opportunities for and acceptance of previously disadvantaged groups, such as women, Maori and homosexuals, and access to life-chance-enhancing services such as education and health care. On the other hand, compared with four or five decades ago, social stability is diminished, crime is higher and income and wealth divergences are greater and that worries a growing number of people.

Sir Frank could therefore usefully examine and quantify those other indicators of wealth, or as an economist would say, welfare, and develop a measurable, usable and acceptable index of overall welfare with which to assess our actual status compared with other societies.

But let’s assume GDP will be a large component of that wider definition of welfare, not least because it is an enabler of some of the other components: high-end health care for all, for example, is expensive and affordable only by economies with a high GDP per capita. So Sir Frank’s programme of work will outline the optimum policy path to higher productivity growth. We already have an open economy, which is probably responsible, along with a much-improved regulatory environment, better state management and fiscal prudence, for doubling productivity growth in the 1990s. Getting another commensurate increase in this decade (after marking time for the past half-decade or so under a kinder, gentler government) will not be simple, given that we do not have Australia’s mineral and hydrocarbon resources, business and households are heavily indebted to the outside world and New Zealanders have what seems to have become a pathological aversion to saving in forms that generate capital for business investment; and in any case we have small and illiquid capital markets.

As part of this element in his programme, Sir Frank might develop Arthur Grimes’ work and distil for us how much of the gap between New Zealand’s GDP per capita and Australia is due to specific differences in natural resources — and, we should add, to different demographics, since Australia does not have a large, economically underperforming Polynesian component — rather than differences in policy settings. Another part might start with our balance of payments and ask two questions. One: is tourism taking over as the lead sector in the real economy and if it is, can tourism lead us to a high-wage economy? Two: is it important to reduce national indebtedness and increase local ownership of the real economy and, if it is, how can that be done?

Next on my programme for Sir Frank is New Zealanders’ large appetite for government. That is very gratifying for politicians who are happy to supply it, especially to enhance some of the broader aspects of welfare I mentioned earlier. But many, arguably most, of the dollars spent on those other aspects of welfare are dollars not spent on growing the economy. My challenge to Sir Frank is to find out for us the optimum taxation rate for raising productivity growth without sacrificing improvements in the broader aspects of welfare.

That essentially asks Sir Frank to find an optimum balance between private and government activity. And he will need to do that in a dynamic setting. Today’s under-40s are used to customised products and services and the under-25s even more so: teenagers these days bypass record stores and download songs for their computer or iPod personalised libraries. States and governments have got away with monolithic services so far but this can’t last. Education in particular will change — has already started to change — as parents and students seek out personalised options. Health care will follow, if for no other reason than that the state cannot go on funding “free” care with costs persistently rising faster than GDP. Workplaces will continue to fragment, defying attempts to apply rigid rules.

I should perhaps stay a moment on education and health, since they consume a large and growing share of the government’s budget.

Sir Frank is no stranger to education, both as a practitioner — many economists passed through his hands during his time as an academic — and as a major contributor to policy. I have put three items on Sir Frank’s agenda for education. One is the role of pre-school education and, in particular its potential or otherwise for lifting the learning capacity and achievement in primary and secondary school for those children who get a poor start in family life, who do not get talked to and read to. The second is tertiary education which seems to me to be a costly mess that is entrenching privilege for the middle classes rather than serving real economic or individual need. The third is basic skilling, vocational skilling and reskilling. My guess is that some deep rethinking is needed of the purpose and practice of education and of the relative responsibilities of the state, the individual and the employer. Sir Frank’s research could tell me whether my guess is wrong or right and, if right, how education should be rethought. I reckon that project will be ongoing throughout his 20-year programme. It will need funding from outside the government because governments will want to think they have got it right.

Sir Frank will also need to spend a good part of his 20-year programme untying the Gordian knot of rising demand for bodily repairs, as a result of bad eating, deafening music in bars, the constant invention of expensive drugs and machinery to do the repairs and lengthening lifespan expectations. Exhortations to eat better, exercise and nobly refrain from insisting on quintuple bypasses will not suffice. Some mechanism apportions more cost to consumers and/or punishes those who have eaten, drunk and otherwise behaved irresponsibly might be needed. To misquote Tony Blair: tough on health, tough on the causes of health.

Talk of more cost sharing leads to notions of asset-based individualised accounts for education, retraining, unemployment, health care and income in old age. Sir Frank needs to start on this part of his programme smartly. Or perhaps not: maybe these alternatives will be developed outside the government — Ngai Tahu’s experiment may be a pointer. Business’s case for lower taxes would be stronger if it exchanged its culture of complaint for action to meet its own workforce needs with better workplace practice.

Which leads us directly to another conundrum which needs Sir Frank’s urgent attention: the huge rise of welfare rolls over the past 30 years. I include in that the looming rise in over-65 dependents. Can a modern economy, under constant challenge from Asian economies, sustain this level of state-sponsored altruism? If not, what sensible, humane and sustainable policies to bring down those rolls are politically practicable? And, while he is devising an answer to that question, which I imagine will take a decade or more of his time, to the detriment of his duty in the rose garden, Sir Frank could toss off a solution to a conundrum within that conundrum: the discouraging marginal tax rates that afflict those who do step off welfare into work.

As the welfare rolls poser indicates, policy is not dogma nor even ideology. It is principally a matter of pragmatic balance and any theory at the base of policy is best to be empirically based. That is because policy is ultimately decided by politicians. And politics — with rare exceptions such as the revolution in the 1980s — is the art of the possible. Governments stay in office by successfully balancing competing interests. Unbalanced policy up-ends governments. Sir Frank, I think, has always understood this, which is why he has been valuable to so many politicians of diverse political stripes.

So here is another balancing act that could benefit from Sir Frank’s advice: the balance between business development and preservation of the natural and cultural heritage. A lot of simplistic prejudice clouds this argument. A monograph from Sir Frank would carry more weight than earnest position papers from the Ministry for the Environment and Local Government New Zealand. He might take as his theme the word “enabling”, to bring a positive perspective to a regulatory process that too many people see through a negative perspective, that is, with “blocking” as their theme word.

This country markets itself on its natural heritage: clean and green, “100% pure” and similar fluffy but untrue sweet nothings. That promotion sets up a tension between preserving the natural heritage and using it, between hoarding it and selling it, between trading on it and making sure it is still there to trade on. We aren’t particularly clean and green — just conveniently empty. Farmers see themselves as at war with the Department of Conservation when they could be seeing business opportunities in high-end environmental and recreational tourism. I think there is ample work there for Sir Frank to draw from all parts of the spectrum of opinion, attitude and vested interest, perhaps in a series of studies taking five to 10 years. He might focus initially on the government’s abject failure to drive energy efficiency.

That leads Sir Frank readily on to a string of issues that no economist would have thought about when he was first a professor. These are issues of ethics — in biotechnology, for example, as techniques are developed over the next 20 years that will worry some as intruding where only God should go; or in business, both in business practice but more broadly in responsibility to society, including natural and cultural heritage. Governments will have to wrestle with these matters. Sir Frank, a man of impeccable personal ethics, could help.

Now look outwards. This has been one of Sir Frank’s strongest contributions, principally on trade (as a participant in numerous forums and the writer of numerous monographs) but within a much wider frame. We should remember Sir Frank began working life in the External Affairs Department. He is no narrow Bhagwatian trade theorist. He knows theory of course but he understands the human frailties that get in the way in international affairs. So I look forward to refreshing and continuous analyses of the rise of China and India, the possibilities and threats in a free trade deal with China and eventually India and the huge new challenges to maintaining a competitive and rich economy in this tiny speck dangling off the end of the Asian region. I hesitate to speculate that his answer, if he peers out to 2104, might be to “join em” by importing Chinese and Indians and remaking us as an Asian nation.

And while he is at that, Sir Frank might work on a population policy. In the past we have just plundered other countries’ populations when we were short. That might not be so easy over the next 20 years and if we cannot import enough people to fill our workforce and keep the baby-boomers comfortably in retirement, where will they come from?

Sir Frank was involved in the trans-Tasman forestry agreement 40 years ago. He was a very early advocate of CER and is a member of the Australia-New Zealand leadership forum. I expect him over the next 20 years to remain continuously involved in the policy debate on integration of the two economies, including whether we move to a single economy via a single currency, to which he was converted — or subverted — a few years back by Arthur Grimes. If Sir Frank is tempted from that into issues of political integration, I will be tempted to have a quiet word or two over the vintage champagne I expect to be served at dinner tonight, especially on the cultural distinctions that are developing between the two former British colonies.

Which brings me to the project that will take every last minute of Sir Frank’s next 20 years. It overarches all the others and delimits how successfully we will manage all the other policy challenges.

New Zealand is becoming a Pacific country in more than its geography. The Polynesian influence is now undeniable in our popular culture, especially in music, and in the culture generally is set to grow beyond the tokenism my generation grew up with. The 800-year-old breach with island Polynesia brought about by the Maori migration is being re-bridged. It has been dawning on the more thoughtful among us that Maori and Pacific islanders are already a delimiter of our economic potential and will become more so, through their numbers and their hitherto relatively poor educational, economic and social performance compared with what is needed to compete internationally in the modern world. We know we cannot put strong sports teams into the fields and on to the courts without a large Polynesian, including Maori, component. We are dimly aware of the vibrancy of Polynesian, including Maori, music. We sing the Maori words of the national anthem first and we use more Maori words every year in our everyday speech. And this cultural infusion is underpinned by a growing influence of Maori in our politics and our decision-making, now embedded to a degree scarcely imaginable 20 years ago and further embedded by this week’s legislation.

There will be discomforting and at times dislocating tension and difficulty over the next generation or two as a once securely British colony, newly indigenising, reacts, responds and readjusts to this Polynesian phenomenon in its politics, its culture and its day-to-day life. New Zealanders — Aotearoans — are pragmatic and generally goodwilled. But this cultural and political earthquake has shaken them. They are puzzled, excited, angry, optimistic, fearful and triumphant.

Sir Frank, success in all the other challenges and puzzles facing policymakers over the next 20 years is contingent upon success in this wrenching national adjustment. You were a child of empire. You fought for this country and the great British legacy of liberty. You have contributed mightily during our long and winding shuffle towards independence and nationhood over the past half-century. As we enter the Pacific stage of this evolution, New Zealanders — Aotearoans — uncertain, enterprising, hesitant, brash — could do with your insights and counsel.