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A culture of tax evasion.

datePosted on 11:25, April 15th, 2016 by Pablo

I do not understand what the fuss is all about when it comes to John Key and the revelations in the so-called “Panama Papers.” So what if he and other Kiwi high rollers shield their incomes and assets from the IRD in assorted trusts, funds, investments and even shell companies? Isn’t it an axiom of capitalism that, as Donald Trump has openly stated, you try to avoid as much tax payment as possible? Forget all this nonsense about “paying one’s fair share of taxes.” Only rubes and idealists do that. Everyone else tries to minimise their tax exposure and the rich pricks just do so on a grander and more elaborate scale.

I say this because the entire NZ economy is riddled with tax avoidance. One of the things that struck me after I moved to NZ is the amount of cash transactions that are done with the explicit intention of avoiding tax. Almost every single tradesperson I have dealt with in the course of my time here has proposed a cash transaction that avoids GST, but more importantly, avoids traceable electronic or paper (cheque) financial transfers. And the offers of non-GST cash transactions are done without shame or concern; it is just part of doing business for many people and everyone knows it and acts accordingly based on their own circumstances.

If what I have seen in the small business trade and service sector is any indication, then it is reasonable to expect that such attitudes percolate upwards into larger corporate structures and repositories of wealth. Since these are too big to hide in a cash-only parallel market, the next best thing is to engage in tax evasion and income-hiding schemes whose complexity is based upon the ability of the tax authorities to uncover them. The move to off-shore trusts and the like is simply a matter of keeping one or two steps ahead of the law and three steps ahead of enforcement mechanisms. If those in government choose to structure the financial regulatory regime in such a way that it keeps the holders of wealth five to ten steps ahead of the tax authorities then, well, you get what you vote for.

The difference between the approach of NZ high and low rollers when it comes to tax evasion is in scale, not kind.

This is one reason why I believe that the Transparency International rankings that have NZ listed among the top three least corrupt nations on earth are rubbish.  Add to that the nepotism, cronyism, shoulder-tapping, sinecure swapping and insider trading of everything from personal and professional favours to board directorships to stock shares, and the picture of NZ is far less rosy and far more, let us say, “pragmatic.”  I am particularly critical of the TI indexes because not only are they mostly based on reputational analysis (mostly offered by those who stand to gain from gaming the system), but because I participated in a TI survey of NZ’s intelligence and defense forces and saw my scores (and those of some others) pretty much discarded in favour of higher scores offered by insiders that led to an overall TI assessment that NZ has the highest standard of professional integrity amongst the defense and intelligence services in the Asia-Pacific.

Even so, I am one of those who are a bit idealistic when it comes to taxes. I understand the concept of public goods and therefore comprehend the rationale behind taxation. In NZ I pay tax more readily at a higher rate than I did in the US because, among other things, I am not paying to support a huge war machine that in turn serves the interests of a taxpayer subsidised military-industrial complex. As a small business owner I feel the burden of taxation more heavily and immediately than the corporate moguls that run the nation’s largest firms and whose bottom lines rest on minimising two things: their tax liabilities and their labour force wage bills. Yet I try to believe that I am contributing my small bit towards maintaining a high standard of public education, health and welfare that will lead to future generations of productive and happy citizens (although my experience with NZ academia suggests seriously diminishing returns in that sector, and I have serious doubts that overall heath, education and welfare outcomes are on the rise rather than in decline as a result of nearly a decade of National government public policies).

In spite of these misgivings, I remain a residual idealist and want to believe that my contributions, when taken collectively with those of others, matter for the present and future well-being of NZ. But I do not expect others to share the same hopelessly naive view of how the systems works, and I therefore do not begrudge them trying to dodge the taxman as much as possible. Because in a country where market-reifying ideologies reign supreme in virtually every facet of life, only a fool like me would think that paying taxes is anything but state-imposed theft levied on the productive in order to buy the acquiescence of the parasitical. I know this to be true because National, ACT and certain elements in Labour tell me so, and who am I to argue with those who dominate our economic, political and social narrative?

I was invited by the nice folk at to contribute a short essay related to sustainable economics from my perspective as a geopolitical and strategic analysis consultant. The essay wound up  making the connection between political risk and sustainable enterprise, and more importantly, the relationship between sustainable enterprise and democracy. You are welcome to view it here.

Trading with the Mullahs

datePosted on 18:45, September 17th, 2015 by Pablo

I was a replacement panelist invited by the New Zealand Institute of International Affairs to join a discussion in Wellington on the Iranian nuclear agreement. It was a a pleasant event that addressed the pros and cons of the deal. I was impressed with some of the speakers, particularly Dr. Parsi from Lund University (speaking via Skype). I was less impressed with the Israeli discussant and the statements (not question) by an official from the Iranian embassy who was in the audience.  All in all, it was an engaging affair and I encourage the Institute to continue with such public outreach efforts.

I spoke a bit about how the deal can be viewed on two analytic levels: as a First Image (interstate) issue and as a Second Image (domestic sources of foreign policy) matter. I mentioned that a way to conceptualise the agreement is as part of a “nested game” (to use a game theoretic term): the deal is part of a series of interlocked interactions (or “games’) that can be seen much as those iconic Russian dolls are (one inside the other) or as building blocks towards a larger whole. I noted that the core of the agreement was to exchange trade for recognition and security–in other words, Iran gets more trade and recognition of its legitimate interests and stature as a regional power by putting the brakes on its nuclear weapons development program with an eye to cancelling the weapons program altogether should the agreement prove beneficial for all sides. They main lever is another trade-off: dropping of international sanctions against Iran in exchange for a rigorous international (IAEA-managed) inspections regime.

For those who are not familiar with the agreement, it is not a bilateral US-Iran affair although they are the major players in it. Instead, the treaty was negotiated by the P5+ 1 parties and Iran, the P5+1 being the permanent UN Security Council members (the US, UK, France, China and Russia) plus Germany. For those interested in the details of the deal, the official US government position is outlined here (which includes the text of the full Agreement itself). A US translation of the Iranian interpretation can be found here. The fact that the P5 agreed to the deal is remarkable given their history of disagreement and subterfuge on matters of international security.

There was an interesting sidebar about “breakout time” introduced by the Israeli, who waxed hysterical about the apocalyptic implications of the deal. Dr Parsi noted that “breakout” refers to the time needed to enrich uranium to weapons grade, in response to the Israeli claim that the deal gave the Iranians a breakout potential of one year. Prior to the deal, that enrichment breakout threshold was two weeks. The point is that “breakout” time refers to the time needed to begin enriching uranium to weapons grade rather than the time needed to build a bomb.

Dr. Parsi noted that “breaking out” on enrichment is not the same as putting nukes on missiles. I said nothing at the time but here I actually know a bit without being a nuclear scientist ( I studied nuclear strategy under one of the original strategists behind the nuclear bombing of Japan and so-called MAD theory. He grappled with the moral dilemmas involved in front of me and my student cohort at the University of Chicago (home of the Manhattan Project) and later changed his mind with regard to MAD). The notion that Iran can start enriching uranium or reprocessing plutonium to weapons grade in a short period of time and then quickly build a missile launched nuclear warhead is simply mistaken.

From a technical viewpoint beyond the specifics of Iran’s enrichment and reprocessing programs, the problem of weaponising nuclear material is simple. Unlike the multi-ton “dumb” bombs that were dropped on Hiroshima or Nagasaki using concentrated high explosives as triggers focused on the nuclear material, the bulk of testing then and now consists of reducing the nuclear payload to a size that can be carried in the nose cone of an (increasingly small and light) intermediate range or intercontinental missile (IRBM or ICBM). The smaller the size of the delivery vehicle, the better its chances of avoiding surface to air or air to air interception. Given that requirement and the need for accuracy, nuclear payloads share very tight space with guidance systems. All of which is to say that given the weight constraints on a high velocity long range projectile, the “bomb” has to be miniaturised for maximum bang for the buck. Doing so requires downsizing the trigger mechanism from focused high explosives to something else. Laser triggers are one option. There are others.  All of them are off limits to the Iranians irrespective of the deal. So not only is the fear of “breakthrough” unfounded and exaggerated for political purposes, but the real concern regarding mounting nukes on missiles is subject to  both contractual and non-contractual enforcement.

My general view is that the agreement is worth doing. Other speakers and I commented on the downside, which mostly involves the reaction of Israel and the Sunni Arab oligarchies as well as domestic opponents in Iran and the US. I noted that there are disloyal hardliners in both the US and Iran that have potential veto power over the deal in the future should governments change, and that it was imperative for the soft liners or pragmatists to accrue tangible benefits from the deal in order to resist the sabotage efforts of hardliners who have vested interests in keeping tensions alive between the two countries. I made the point that Iran is more akin to Cuba than North Korea, and can be brought into the community of nations so long as it was recognised as a regional power with legitimate interests.

Speaker’s times were very limited (7 minutes each), so I was unable to fully address what I had intended to say. So let me do so here.

The lifting of sanctions on Iran as part of the quid pro quo at the heart of the deal opens a window of trade opportunity for New Zealand exporters and importers (more so the former than the latter). Coincidentally,  Foreign Minster Murray McCully has announced that in a few weeks he will be leading a trade mission over to Iran to discuss those opportunities. This is in advance of the implementation of the accord (which goes into effect at the start of next year) and is, as far as I can tell, the first official Western government led trade mission to Iran in the wake of the signing of the agreement.

But let us be clear on what that mission needs to entail. Although Iran’s human rights record needs to be mentioned, however pro forma by McCully, to his Iranian counterparts, the point that must be emphasised is that New Zealand’s opening of trade relations with Iran is absolutely, explicitly contingent upon Iran adhering to its part of the bargain. Should Iran in any way shape or form renege on the letter or the spirit of the agreement and the inspections regime that it authorises, then McCully needs to make clear that New Zealand will terminate or at least suspend until Iran complies all imports and exports to the Persian giant.

I say this because under McCully and Tim Groser MFAT has turned into the Ministry for Trade with Anyone for Trade’s sake. Human rights and non-proliferation are not part of the Groser/McCully negotiating agenda. But in this instance both need to be and the latter has to be. The profit margins of New Zealand exporters and importers and the tax revenues derived thereof must not and cannot supersede New Zealand’s commitment to upholding the terms of this non-proliferation agreement in the event of violations. Those involve re-imposing sanctions, and the bottom line of private interests must not come before the commitment to non-proliferation, especially given New Zealand’s long held diplomatic stance on the matter.

McCully also needs to explain to New Zealand importers and exporters that any contracts they let in Iran are contingent and externally enforceable. That is, they are contingent on Iranian compliance with the inspections regime and the overall thrust of the Agreement (which is to reduce the prospect of weaponising its nuclear program); and they are subject to outright cancellation or suspension by the New Zealand government under penalty of law in the event Iran reneges or violates its side of the bargain. There are opportunity costs and risks involved, and these need to be outlined to interested parties in advance of the mission.

From announcements so far, it does not appear that the National government is interested in making such demands of the Iranians or its market partners. Instead, it appears that it is opportunistically jumping to the head of the cue of potential trade partners and will let the private sector lead the charge into trading with Iran. That is curious because McCully speaks of “not getting offside” with the P5+1, but the very fact that he mentions the possibility of “getting offside” indicates that he and his MFAT minions are considering the costs and benefits of doing so.

The Iran deal hinges on two things: verification and enforcement. There are instruments in place to verify that Iran is upholding its part of the deal. The sanctions will begin to be lifted on January 1, 2016. But it is enforcement of the terms that is the most uncertain aspect of the Agreement. If New Zealand does not explicitly tie its renewed trade with Iran to the latter’s compliance with the terms and be prepared to halt trade with Iran in the event that it does not comply, then it will begin the slippery slope of undermining the deal. For a Security Council member that depends more on reputation than power for its influence, and which has a past record of leadership on non-proliferation, that is a hypocritical and ultimately vulnerable position to be in.

I have noted with growing despair the xenophobia which is becoming a political commonplace this election cycle. On the left it’s about house prices.* But this post is not about racism; it’s about development.

The national median house price is $415,000, a figure skewed substantially upwards by the extraordinary cost of housing in Auckland. But you can buy a three bedroom house in Taumarunui for $26,000, or for $67,000 in Tokoroa. These are extreme examples, but for considerably less than half the median price you can buy a charming colonial villa in Tapanui ($149,500). For a little more than half the median you can buy a newly-renovated house on an acre in central Gisborne ($225,000). Similar houses are available for not very much more money in larger regional centres like Dunedin and New Plymouth, and that’s without considering many apartments, townhouses and more modest types of dwelling.

There are houses out there: there just aren’t jobs to go with them.

The chart above shows income and employment growth by region, and this is why the houses are so cheap. The growth is just not there. (From the Ministry of Business, Innovation and Employment Regional Economic Activity Report 2013).

It’s not just jobs, though; there’s more to life than work. People need confidence in their opportunities in a new place before they will, as Jolisa Gracewood says, buy shares in that community by owning or renting a house there and settling down. They need schools and hospitals and civic institutions and a sense of belonging, they need certainty about their community’s future, and their future within it.

The community likewise needs needs certainty in its new arrivals. A gold rush or an oil boom might provide jobs and cash, but it doesn’t provide certainty for either group. Certainty — and opportunity — comes from deep and sustained development. The fly-in/fly-out mining towns in Australia are a good example, and while that industry has been instrumental in maintaining Australia’s robust economy, its direct value to the regions has been limited — trickling down, lifting all boats — without the adoption of targeted development initiatives such as Royalties for Regions, which seek to return a share of the proceeds of industry to local communities.

As Eric Crampton said about the census income growth figures, increases in average wages across much of the South Island have been coupled with decreases in population, as people on low incomes move in search of better-paying work. Rob Salmond agreed, saying:

The regions with the supposedly highest median income growth also had some of the worst records in population growth, while the areas whose populations grew the fastest had relatively little change in median incomes.

Returning to the MBIE chart above, notice the regions in the top-right quadrant: the West Coast, Waikato and Taranaki. These are distinguished by two characteristic sectors: dairy, and mining, each of which provides a relatively small number of well-paid jobs within a narrow sector, skewing up the income levels but not necessarily changing the overall development picture very much. As crucial as the dairy industry, in particular, is and will continue to be to New Zealand’s economy, a complete solution to development it sure ain’t. Which is why you can buy an enormous Moorish-inspired villa for $220,000 in the middle of gas and dairy country.

Diversification and specialisation
The object of a regional development policy must be to promote structural change, to create industries and communities that are sustainable in their own right — neither transient nor exhaustible, and which attract people whose commitment is likewise neither transient nor exhaustible. These jobs need to go beyond the traditional churn industries like tourism, hospitality and service; though, of course, these jobs will be needed, they should be incidental to development, not its purpose. They need to be high-value and export-led — unlike, for example, our timber industry, and our wool industry. One of our key advantages here is our reputation for being clean and green — demand for premium food, the safety and quality of which can be assured, and including organic and sustainably-produced, is likely to grow strongly and we seem ill-prepared to meet this opportunity, as just one example. Another example is the potential of Māori business, which is as yet terribly underutilised.

In New Zealand we talk a lot about the roles of government in distributing wealth, and in ensuring public access to health, education and other scarce resources. These levers are well-recognised and there is at least a moderate degree of bipartisan agreement on their use. This is not the case with regional and economic development strategies, where there are deep practical and ideological divisions between the parties. I can see why the noninterventionist technocratic right parties like ACT and National are reluctant to consider — or even recognise the viability of — the sort of robust, hands-on regional development strategy that will sustainable economic and community growth in regional areas and persuade the frustrated and overcommitted residents of our major cities to risk a change. It will require considerably more input than building roads, granting mining permits and water rights to permit the extraction of value directly from the land. It will require a lot more than public-private partnerships and white-elephant monorails through virgin rainforest. It very likely will require PPPs, roads, and mining rights, though, meaning the left will have to reconsider some of its positions as well. It will require thorough investment in infrastructure, especially transport infrastructure, and purposeful community-building, possibly funded by a deeper cut from mineral royalties, a localised share of revenues from key industries, or loans from the government. It will probably require considerable autonomy devolved to the communities affected, and the strengthening — rather than the weakening, as is currently happening — of local government. It needs to be a little bit New Deal and a little bit Think Big.

Diversity is resilience, and our economy is very narrowly based. That must change. Different regions have their own strengths — environmental and historical, in terms of personnel and capability — and this represents an opportunity to improve the national economy holistically, by strengthening each of its component parts, rather than by building one economic muscle until it threatens to throw everything else out of balance. In many cases these nascent strengths will need considerable augmentation, and some will need to be developed almost from scratch. That requires significant and sustained investment in research and development — contributions to which the National government cut during the time when it was most crucial; when talent needed to be incentivised to stay here, and when industry needed to prepare to take advantage of the recovery, when it arrived. Public-sector research agencies can be beneficial in quite unpredictable ways, and when it comes to blue-sky research, patience can pay off enormously. If you’re reading this over Wi-Fi, you can thank the Australian government’s scientific agency, the CSIRO.

People and places
One obvious and direct means by which the government can influence regional development is by decentralising — by relocating government departments or agencies to regional centres. At a minimum, governments could decline opportunities to actively dismantle regional industries — such as Invermay — for the sake of short-term cost savings or change for its own sake.

It is clear that having a critical mass of mobile public servants all located within a kilometre of each other can increase efficiency and cross-pollination in government and business. Some significant new businesses — such as Xero and Vend — clearly benefit from strong cohabitation and the development of their own start-up cultures. On the other hand, in the past decade telecommuting has become plausible for a large proportion of people whose work is predominantly reading, writing and talking on the phone, and the major reasons it is not more widely used are to do with middle-managers wishing to retain some measure of direct control over their staff, which they label “team culture”.

There are costs and benefits to decentralisation, but it is hard to shake the sense that government, and the public service, are growing increasingly remote from the people whose interests they ostensibly serve. The gap between the experience of living in Auckland or Wellington and living in the rest of the country is vast already, and is likely to grow. Over the long term, as regional development improves, mobility will increase, as the economic and cultural risk of moving to or from a major centre will decrease, and this seems likely to yield an even greater cross-pollination benefit than that sacrificed by decentralisation.

Political laziness from the left
The reason the housing markets in Auckland and Wellington are refusing to cool is because people — both internal and external migrants — want to live where there is opportunity, and Auckland and Wellington is where the opportunity is. Blaming foreigners for the continually-rising house prices in Auckland is counterproductive. It’s lazy populism for the opposition to monger fear on these grounds, and it’s clear why the government is perfectly willing to let them do so: first because it cuts against the left’s political brand, and second, because it frees them from responsibility for what has proven a poor regional growth strategy during their time in government.

Labour and the Greens have taken strong and well-articulated positions in favour of regional development and smart growth but they’ve also gifted the government an opportunity to reframe what is essentially an economic development debate as being about housing and migration, when the former is a symptom and the latter is all but irrelevant. As a consequence the whole discussion gets sucked into an unwinnable partisan slagging-match. This isn’t so much a failure of policy, but a failure of political emphasis. It should be relatively easy to correct: they mainly need to stop complaining about the yellow peril, and start talking about the future of a country where wealth and innovation is spread beyond its main centres.

Although I disagreed with his dismissive attitude towards the marriage equality debate, it seems likely that the once and future member for Napier, Stuart Nash, will be an important member of the Labour caucus in future. Late last year he argued persuasively that the regions are crucial not only for the economic wellbeing of the country, but for the wellbeing of that party, and so for the wider left. As he says:

If any party only holds seats in Akld, Wgtn, Chch and Dunedin, then they don’t have a particularly wide mandate to govern because they haven’t got MPs in caucus putting forward the views of the vast majority of geographic NZ.

To an extent it is understandable that this hasn’t happened yet. Development is hard. It takes a long time and a lot of money, and in a political context where governments change no less often than once per decade, it requires an uncommon degree of accord between increasingly diverse political movements. With the Greens now forming a substantial and apparently-permanent adjunct to Labour on the left, and the emergence of new climate-sceptic and anti-environmentalist sentiments within National and its allies, this is a big ask. But it needs to be done nonetheless. The regions aren’t going to develop themselves; they haven’t got the wealth or the people to do so, because it’s all tied up in tastefully-renovated villas on the North Shore and in Thorndon.

This is not an entirely theoretical discussion for me. All going to plan, at some point later this year my family and I will move from the Kāpiti Coast to Dunedin. My wife is going to the University of Otago to work on the postgrad study she’s been wanting to do for 10 years. We’d have done it years ago if we could — every time we’ve been to Dunedin, we’ve said we’d move there in a heartbeat if only there was work. Mostly what’s changed now is that I can bring my work with me.

The reason we live out here is because out here is where we could afford to buy a house on one modest Wellington income. The idea was always to move into town at some point, but that has gotten more distant, not closer, over the past five years with Wellington’s housing market proving largely impervious to the recession. So off we go.

We anticipate significant benefits. My wife will be able to do something meaningful with her life other than raise our kids full-time or working as a rest home carer, worthy though both those tasks are. Commuting into Wellington would cost dozens of hours and hundreds of dollars a week, and at some point both of us would inevitably end up far from our young kids when they needed us. But not least among the advantages is the regional arbitrage of continuing to bring in something like a modest Wellington income while living in a place where houses are, very conservatively, $100,000 cheaper.

But there’s the thing: unless you’re privileged enough to work in a field where you can telecommute (and bosses who’ll let you), or unless you work in a literal field, moving from Auckland or Wellington to pretty much anywhere else in the country is a big risk. (In Christchurch, the case is much more complex.) You can move, but for many people, the opportunity is just not there, and the risk of giving up what you have is very great.

The government that raises those opportunities will find favour with those who want to move, those in the regions whose economies and communities are boosted by new growth, and those in the main centres who wish to stay, or must stay, who will have richer opportunities for doing do.


* On the right it’s more about asylum seekers (National) and internal threats to the colourblind state (ACT). The only party that seems clean of this is United Future, for which Peter Dunne should be congratulated.

National Lite

datePosted on 17:29, May 15th, 2014 by Lew

It’s been almost a year since I wrote anything here. Things have been complicated. Anyway, this will — I hope, and circumstances permitting — begin a return to participation. All thanks due to Pablo for holding things together.

Answer: Nobody. That’s the problem.

Today was budget day. The carnage in Australia with Joe Hockey’s first budget two days ago was worse than even the Abbott government’s enemies had predicted, with deep cuts to education, welfare, superannuation, science funding and many other fields, including the imposition of a $7 surcharge for GP visits. The contrast here could not be more stark: a return to surplus not immediately thrust into lowering taxes, modest cuts in some areas, increased entitlements in others, particularly in support for young families, and notably the extension of free GP visits to children under 13 years of age.

I’m no big-city economist so I’ll stick mainly to the political aspects. But it basically looks like Bill English’s sixth budget — somewhat like the preceding five, but to a greater extent — does a little good and almost no evil, and that basically ruins the opposition’s game plan, which relies on Bill English and John Key being terrible ogres that eat babies, rather than supporting their parents with leave entitlements. When the man touted as the Labour party’s most left-wing leader in a generation is reduced to complaining that John Key has stolen his party’s policy — as if that is supposed to be a bad thing — things are pretty dire. The opposition’s increasing desperation over the past six years, continuously prognosticating doom over the horizon, simply looks ridiculous when the doom never arrives. The government has snookered the New Zealand left by simply doing what it said it would do, and as Pablo argued persuasively at the start of the year, that makes clear how lacking the New Zealand left is in its strategic vision. They — Labour especially — are relying on the government to do their heavy ideological lifting, and when the government declines to be explicitly evil, the opposition is left with nothing to say.

When your enemies move to occupy your ideological ground, it is an opportunity to extend that ground, replacing what they claim from you with more advantageous ground deeper within your ideological territory. The trouble for Labour is that National has moved towards them, and Labour are still trying to fight them for the same ground rather than staking out more ground of their own. Six years after the “Labour lite” campaign that saw them ousted in the first place, they haven’t learned. Today’s budget has been tagged Labour lite by commentators including Bryce Edwards and Labour’s own Rob Salmond.

Due to assiduous work by National, and a conspicuous lack of it by Labour, “Labour lite” is now more or less indistinguishable from “Labour”, and Labour has offered no sort of “Labour heavy”; full-cream Labour, deep-red Labour, or whatever other metaphor you like. Because of this lack of difference, the electoral decision comes down to competence: of these two groups of mendacious grey technocrats, which is the least likely to inadvertently screw things up, or intentionally, as Jan Logie puts it, f&%k people over? That’s an easy answer: Labour demonstrates its lack of general competence every single day. If it’s not clear by now that they’re simply not as good at being the Nats as the Nats are, when will it ever be?

It’s too late, now, to change this ahead of the election. The die is cast. Labour has — again — decided to rely on political meta-strategy like syllogising failures of judgement or conduct by individual MPs out to the wider government, and it might have worked had they any sort of foundation to build upon. But they don’t. Far from full-cream Labour, Labour itself is Labour lite. Light-blue, even; 98% Ideology-free. If they’re going to play the National-lite game, they at least need to get good at it.


Evaluating export growth.

datePosted on 09:55, February 3rd, 2014 by Pablo

Much has been made of the fact that since the entrance into effect of the bilateral Free Trade Agreement (FTA) with China in 2008, New Zealand exports to China totaled NZ$33.7 billion in the six years since then compared to NZ$9.9 billion in the period 2002-08. In 2007/08 before the FTA went into effect exports to China totaled NZ$2.5 billion, and in 2012/12 they were worth NZ$7.7 billion. That is more than 200 percent growth in six years, or more than 45 percent per year (Hat Tip: Kiwiblog)

Needless to say, pro-trade cheer leaders think that this is a great thing. And perhaps it is. But before we get too excited and proclaim the absolute benefits of this bilateral, a few questions need answering.

First, what is the volume and worth of imports from China during the same period? In other words, what is the state of the bilateral trade balance?

Second, has the FTA led to export commodity diversification or concentration?

Third, has the increase in bilateral exports led to an increase in employment in the export sectors affected?

Fourth, has there been a trickle down effect evident in the expansion of auxiliary industries and tax revenues derived from them and the export sectors involved?

Then there are subsidiary questions:

Has overall NZ GDP per capita and income distribution increased as a result?

Have occupational health and safety standards improved in the export sectors associated with the FTA?

These questions are important because they illuminate more precisely who has and has not benefitted from the FTA.

I invite readers to do a little research on these questions, using the government’s own sources as well as academic studies. The findings may come as a surprise, as oftentimes macro-statistics mask the meso- and micro-impacts underneath the “big picture.”

Not all is what it seems.


Whose Team New Zealand?

datePosted on 16:20, September 21st, 2013 by Pablo

As much as anybody I enjoy sports and competition, so much so that I enjoy watching top level competition in sports that I am unfamiliar with. I have therefore enjoyed watching the America’s Cup racing, not so much because of the nationality of the teams but because of the boat design, speed, tactics and seamanship involved. In fact, I am poorly placed to get worked up on patriotic grounds because as readers of my earlier post on liminality may remember, I have allegiances to several countries and divided loyalties as a result. Moreover, I believe patriotism to be the last (and best) refuge of political scoundrels so I endeavour to resist its emotional pull wherever I happen to be living.

In this America’s Cup series I am cheering for Team New Zealand because I know that it means a lot to New Zealand and very little to the US. Other than rugby, Kiwis tend to adopt a “David versus Goliath” approach to international team sports. They are not alone in this small country syndrome, as I have pointed out previously with regard to Uruguay and team sports other than soccer. But in New Zealand that syndrome extends beyond sports, including into the international political and economic arenas.

With regard to the America’s Cup, here in NZ there is live blow by blow coverage of every meter of every race, whereas in the US it is not being covered live anywhere except on boutique cable boating channels. Here it is front page news in every newspaper and news broadcast. In the US it barely rates a header in the sports section of big city newspapers, including that of the race venue San Francisco. Heck, in Texas high school football (the helmeted version) gets more coverage on a weekend than the America’s Cup has had in a year!

In the US most people do not give a darn that Larry Ellison indulges a billionaire fancy with a crew that includes only one American. Here people want to name their first born sons after Dean Barker. They also want that turncoat, traitorous preferably ex-kiwi Russell Coutts strung from the lanyard because he dared to work for the competition. In other words, Kiwis are heavily invested in the outcome whereas in the US they are not.

Or are Kiwis that heavily invested? From what I gather from video coverage of people watching the race live on television on the Auckland waterfront, there is hardly a brown face in the mix. The same goes for those Kiwis who have traveled to the America’s Cup Village in San Francisco. Pure pakeha pulsation throughout.

So where are the non-Pakeha kiwis when it comes to this race? Are they just not into sailing? If so, why not? Why is something that is so heavily promoted by the media and advertisers as a nationalistic rallying point having so little impact on non-Pakeha communities?

I ask because the New Zealand taxpayers have put $38 million into Team Emirates for this race series (both Labour and National support the expenditure). So whether or not they are emotionally invested in the racing, Kiwis are financially invested in it. The public expenditure was justified on grounds that the economic benefits to NZ of a future Cup defense in the event of a win would justify the investment (since winners get to name the venue for the next race). The narrow investment now is said to bring greater and broader future returns.

Besides the fact that no public consultation preceded the allocation of taxpayer money to Team Emirates, the issue of benefits is thorny. Even if Auckland benefits from hosting a future defense of the Cup (and that would mostly go temporarily to hoteliers, restaurants, bars and other service sector providers), what about the rest of the country? Other than Auckland based niche industries like boat-building and sail-making and a few high-end tourist locations and ventures, is it true that the country as a whole will benefit from the tax revenues generated by increased economic activity in Auckland? Do we really expect to believe that places like Ruatoki and Twizel will see direct benefit from an America’s Cup defense in Auckland?

It should be noted that Team Oracle USA received no public funds for its Cup defense, and that the redevelopment of the Embarcadero in San Francisco was a majority private venture that has not yielded the economic dividends to the city that were originally tabled by way of justification for holding the race there. So the “future benefits” argument is contentious at best, especially if drawn over the long-term. Yet spending public money on the challenge is seen as in the long-term NZ national interest.

Put another way, why is it that NZ taxpayers coughed up money for a yacht race campaign that not all New Zealanders care about and which relatively few New Zealanders will benefit from in the form of future uncertain economic returns in the event of a successful challenge this year? Since hosting the Cup defense will undoubtably include allocations of more taxpayer dollars to infrastructure and venue development, is this an appropriate use of public money? Given that the food in schools program receives just $10 million a year, could it not be argued that government priorities are a bit out of whack when it comes to long-term investment in the nation’s future?

Leftist conspiracy types will claim that the government subsidy for a small appeal elitist sport is designed to benefit its rich and upper middle class business supporters, nothing more. I would hope not, but then again I come back to the question of who in New Zealand is truly supporting the Cup challenge. Is the America’s Cup for the few or for the many? In the US it is for the few by the few, but here in NZ the issue appears a bit more complicated.

Anyway, I could be entirely wrong in my read and certainly do not have a good handle on the extent of support for the America’s Cup outside of what I have seen and heard in the media. Readers are welcome to ponder and comment on the issue.

Better to do that than to get started on the subject of host venue race time limits being enforced in low wind conditions on a day when a overwhelming match-winning victory by the challengers was in sight!

The Asiafication of New Zealand production.

datePosted on 16:04, November 13th, 2012 by Pablo

Reports that New Zealanders are working longer hours with more responsibilities and little if any overtime pay, are less unionized and more casualized (part time) than any time before in the country’s modern history suggests that not only has the national model of accumulation changed. It suggests that the labor market and labor process have fundamentally changed as well. The trend towards increased exploitation of human labor as an input commodity, added to an increasing lack of employer concern for the social costs imposed on workers by super-explotation and the long-term nurturing of employees as productive assets, is reminiscent of something that Marx wrote about a long time ago: the Asiatic mode of production.

I have written about the Asiatic mode of production before on this site, differentiating it from Oriental despotism and referring to my observations about Singapore when I lived there in recent years. The core of the model centers on an abundance of cheap and easily replaced human labor. This labor is used instead of machines or other labor saving devices because it costs less in terms of initial investment and long-term maintenance, although it is less efficient in terms of productive output generated by individual laborers. The labor market is dominated by employer “flexibility” in hiring and firing and setting wages, working terms and conditions. Workers are treated as expendable commodities, not as assets. In Singapore this was done via the importation of foreign labor from the sub-continent and Southeast Asia (not to be confused with the foreign “talent,” mostly Anglo-Saxon, that is imported to staff corporate upper management in the island state).

In New Zealand it is accomplished by maintaining unemployment rates at sufficiently high levels so as to have a labor surplus in semi-skilled and unskilled, middle to lower income, mostly youth and entry-level  positions. Creation of lower minimum wage sub-categories (such as the youth wage) and lowering wage requirements for casual or part time work reduces labor input costs. Dropping of social welfare benefits forces people into the job market out of necessity rather than choice, adding to the numbers of the unemployed seeking work. Loosening of the regulatory environment in which most workers work gives them less legal grounds for grievance across a range of issues, from workplace safety to wages.

The combination of factors allow for the easy replacement of semi-skilled and unskilled labor (and in some instances, skilled workers such as academics), which increases the employment uncertainty and precariousness of the work force. That makes employees malleable to employer demands for more wage restraint, more task assignments, more productive output per employee and hence more working hours with little extra pay or benefits. For employees in a labor market characterized by work scarcity, loose regulations and employment precariousness, increasingly onerous jobs are not easy to give up (tragically, Pike River comes to mind). On the other hand, for employers it is a take it or leave it proposition. If workers want better pay or conditions, they can look elsewhere.

The deliberate undermining of collective bargaining by successive National governments (which the Fifth Labour government did not fully restore) and the decreasing role of unions in the labor process plays into this scenario. Less means of collective defense in the face of of the labor market shifts described above leads to atomization of the work force into a mass of uncoordinated and stratified individual opportunity seekers. As the opportunistic ethos takes hold and replaces the collective solidarity ties of previous generations, it reinforces the Asiafication trend.

An important aspect of the trend is immigration demographics. Since New Zealand is labor poor it must import foreign workers in order to grow. The historical use of unskilled Pacifika labor in New Zealand is well known. But what is interesting in recent years is the turn to Asian sources for all types of labor, most of it semi-skilled and skilled. Regardless of specific provenance, Asian immigrants are much less familiar with Western labor market rights and responsibilities and in fact are eminently susceptible to the labor process conditions outlined in the Asiafication model. Moreover, where working class benefits have accrued in Asia, much of that has been done via strong collective action (such as in South Korea) and/or via paternalistic state policies (such as in Singapore). In New Zealand neither of those factors have obtained in recent decades.

The increasingly non-Western immigration demographic appears to be easing the consolidation of the Asiafication trend. New Asian immigrants, schooled in authoritarian modes of production at home, arrive in New Zealand eager to work, relatively ignorant of their rights and less inclined to complain about employment terms and working conditions. To these can be added immigrants from Central Asia and the Middle East, who also have come from mostly authoritarian and highly stratified societies where workers know their place in the social hierarchy and where the concept of collective and individual rights is narrowly construed.

This mass of new arrivals, to include the first generation born and raised in New Zealand, add highly motivated opportunity seekers into the labor market mix. Although some may be refused work because of racism or difficulty with language, the larger trend is to increase competition for the relatively scare available jobs and in doing so lower the overall wage bill. That leads to more income inequality between workers as producers of value and the managerial consumers of their commodified labor.

Another way of looking at the issue is in terms of consent. Over the years Western workers have seen their material threshold of consent, which is the general expectation of fair treatment in the workplace and fair remuneration for providing their labor services, institutionalized in labor law and labor market practices. It includes access to collective representation and bargaining and state enforcement of workplace health, safety and other basic standards for working conditions and pay. What the Asiafication process does is lower worker’s expectations of “fair” treatment in the labor process, which in turn lowers their overall material threshold of consent. Reinforced by institutional and structural shifts that are reproduced over time, this further subordinates the salaried classes to the logics of capital as defined by investors and asset owners.

Asiafication also shows workers their “proper” place. After years of contesting capitalist domination of the political and economic system via party competition reinforced by union collective action in an effort to level the socio-economic playing field, Asiafication helps restore the overt social hierarchies that underpin the capitalist class system and which were camouflaged by design in democratic welfare states.

For employers (as sellers of cheapened labor, value added products), the result of Asiafication is lower price outputs across the board (be it in services, manufacturing or primary good-derived exports). That makes them competitive in the global market of production, service and exchange.

The result for workers is a vicious circle in the social division of labor as well as in production: a labor market created by an economic and political decision-making elite who see modern variants of the Asiatic mode of production as the wave of the future and something to emulate (however hard that is to do under democratic conditions), coupled with an increasingly non-Western immigration demographic that is historically familiar with the “flexible” labor market dynamics inherent in that model and its contemporary applications and which does not necessarily see the Asiatic mode of production, including intense social stratification and opportunistic individualism, as a bad thing. Under such conditions the race to the bottom begins in earnest.

It should also be noted that the Asiafication of New Zealand production facilitates the increasingly Asian focus of New Zealand trade and investment strategy. The push to increase investment in and trade with Asian and other non-Western countries has its domestic complement in the alterations to local labor market conditions. Asian investors who otherwise might be put off by Western labor market standards and regulations can now see something more familiar in the New Zealand labor market, which is becoming more akin to what they are used to in their home countries. That eases the way for the inward flow of non-Western capital into New Zealand’s productive apparatus, something that contractually reinforces local commitment to the Asiaification model.

I am not a labor economist or sociologist, much less an expert on immigration. I am sure that there are exceptions to the trend. The knowledge economy may still be around and centers of productive excellence perhaps abound. It is clear that the welfare state labor market model is kaput. It is equally clear that there are significant variations in Asian and other non-Western labor market standards that argue against making gross generalizations. Even so, there is a discernible trend at play when it comes to New Zealand’s labor market, and that trend derives from or at least resembles modern variants of the labor market typology associated with the larger structural model known as the Asiatic mode of production.

It also seems to me that there is something amiss about a purported liberal democracy that so energetically pursues a model of accumulation that at its core is dependent on a highly exploitative labor process in which material short-term gains for employers is emphasized over the long-term employment security and welfare of workers. After all, the rewards of the former accrue to the few, even if there is some trickle down to the masses. But the long-term stability of democratic society depends on having relatively contented working and middle classes who invest in their jobs not only for immediate gain (or relief), but to help secure the next generation’s material well-being. If that is no longer feasible due to the conditions of production, then something will have to give.

Absent an authoritarian regression along the lines seen in certain Asian political economic models (which would have to include major changes in the basic socialization mechanisms of the citizenry, be they new immigrants or not), it seems to me that the Asiafication of New Zealand production will become untenable over the long-run. Long term disenchantment with economic exploitation turns opportunity seekers into the politically disillusioned, and it is the politically disillusioned who, however apathetic at first, eventually agitate the most for substantive change. Under competitive electoral conditions that means that the politically disillusioned become a potential support base for reform-mongerers and the parties that best represent them.

In summary, I believe that the current Asiafication of New Zealand production is a short-term, market elite-driven solution to a perceived problem of competitiveness that is not sustainable even with the changing national demographic based on non-Western immigration trends. I believe so because I do not think that the elites of New Zealand are prepared or inclined to engage in the authoritarian measures required to impose a new social division of labor consonant with modern variants of the Asiatic mode of production. Absent the will or the way to add Orientalism to the equation, there will be an inevitable political backlash to the Asiafication model that will see its undoing in favor of a labor market that is less exploitative and more attuned to long-term social gains rather than short term business profit.

It will be a good day when that happens. I just hope that it happens in my life time.


A surfeit of services.

datePosted on 09:23, September 17th, 2012 by Pablo

My yearly sojourns to the US provide a regular opportunity to garner a snapshot of the state of the union, at least from my limited perspective. This year I returned to my old stomping grounds in the desert southwest and to the home away from home in South Florida. After a wet monsoon season the desert was lush and the 360 degree skies saturated with cumulus, cirrus and stratus cloud. It was great to hear Norteno music and Spanglish spoken in the street.

My son joined my partner and I for a trip to the old mining town of Bisbee, where we stayed at the haunted Copper Queen (est. circa 1880) and had a long night on the town that ended up in some biker/metalhead dive bar. It was great. I highly recommend the Arizona desert to New Zealanders interested in a dramatic contrast in landscapes and Western cultures.

South Florida has been less pleasant. There is a palpable tension in the air marked by hostile attitudes and unbelievably aggressive, to the point of criminally reckless, driving. The region is known for its fast pace and shallow materialism, but in this trip there is something darker about it. Some of this can be attributed to the election campaign, in which some of the local attack ads are truly astounding in their ferocity and disregard for decency (the issue is large: one-third of the US Senate, the entire US House of Representatives, and most local offices are in play). There is a buffoon Republican named Alan West running for the US Senate, and his ads make the Swiftboat and Willie Horton attack ads look tame. He says nothing about what he proposes and spends most of his time defaming his Democrat opponent. Seeing that Romney is set to lose the presidential race, the right wing talkback and television outlets have ratcheted up the hysteria and vitriol to the point that even John Stewart or Stephen Colbert cannot parody them adequately. In a word, the place is nuts.

This condition of political anomie may be compounding the sense of frustration and anger felt by an increasingly divided–the word “polarized” does not do justice to the chasm between the US right and left–polity that more than anything else is diffident in its regard for politics. Both the Republican and Democratic conventions were not as well attended and not as widely viewed by TV audiences as in previous years, and it appears that the election abstention rate is going to be very high this year. People appear to be cynical, bitter and lacking in hope for the future regardless of who wins in November. All in all, this is the sorriest state of mind I have found the US to be in since my move to NZ fifteen years ago.

That is the backdrop to the subject of this post. As readers will know, the focus of the 2012 US election begins and ends with the economy. Platitudes are proffered and panaceas are prescribed. Words like “competitiveness” and “innovation” are bandied about like lollies. But there seems to be a fundamental misunderstanding of a root cause of the American economic malaise: its reliance on services.

The US is a country dominated by the service sector rather than true productive enterprise. Think of the variety of services now on offer: wealth and asset managers; financial advisors; PR and other “communications strategists;” personal trainers; life coaches (of which there are half a million in the US); pain management specialists (aka pill doctors); landscapers; floral designers; escorts; private alarm and security companies; fishing, hunting and tour guides; real estate agents; internet and in-store movie suppliers; credit card purveyors; nail and hair “artists;” wedding planners; a zillion types of mental health counselors and ambulance chasing lawyers; insurers; car, cat and dog groomers; dog walkers; bird, cat, dog and horse whisperers; DJs; car valets; (for-profit) drug and alcohol rehabbers; tennis instructors; beauty consultants; fashion stylists; liposuction specialists; motivational speakers; management and risk consultants; self-help gurus; personal assistants and agents, accountants; home delivery services; website designers–the list is as varied as it is endless. While one might argue that all retail sales are a service, my point is that in the US the extent of service provision is on its way to infinite, and this infinite progression dominates its economy.

The basic problem of reliance on services as the core of economic activity is that making money through facilitation is not equivalent to being productive. Nor is working hard synonymous with productivity. Americans work the longest hours and take the shortest vacations of all OECD countries. By that standard they should be light-years ahead of the democratic capitalist world in terms of real productivity. But they are not. That is because hard work and income earned in services does not, in the larger scheme of things, add real value to productivity. It may make the national quality of life better, but it does not advance the overall condition of the productive apparatus. It is the economic equivalent of silver–it is nice and attractive, very malleable, easy to buy, wear and replace, but is no substitute for the economic iron required to build and progress a nation.

What is noteworthy about the US service sector is that, at over 75 percent and growing, it is steadily occupying a bigger and bigger percentage of the national GDP (agriculture is less than 2 percent and manufacturing is at 20 percent). The creative genius involved in the proliferation of services is matched by its relentless rent-seeking: in South Florida television ads are dominated by ambulance chasers (who prefer the term “personal injury lawyers”), pill-pushers and geriatric care providers who offer relief and compensation for a myriad of ills previously unheard of or for which personal responsibility used to suffice.

The majority of US college graduates, be they from two or four year colleges, receive degrees in areas other than science or engineering (business, education and liberal arts degrees are the majority of those granted in the US). Since the bulk of undergraduates do not go on to graduate school, this leaves a labor pool full of people who cannot actually produce or add value to anything other than by virtue of their slick talk and quick uptake on the job. Since most people coming out of US universities and colleges are neither particularly articulate or quick on the uptake, their default option is to join the legion of personal service providers.

No that all services are of the silver variety. Some of these are important, such as electricians, plumbers, carpenters, doctors, firefighters, police and lifeguards (I shall defer from elaborating on the public versus private aspects of the service sector, but note that what are considered public services are basically considered to be core functions of government, many of which are being privatized and downsized in the current fiscal environment). Many services are linked via supply chains to the manufacturing and research sectors. Others, such as the information technology services that spawned Google, Facebook and Twitter, create wealth but do not always really produce anything tangible or contributory to the value-added project (which in part explains the lukewarm stock market reaction to the Facebook public stock float). The vast majority of US services are, needless to say, even less contributory to the national productive apparatus.

The critical and deleterious aspect of the services domination of the US economy is that it is moving the country away from the production of real value added assets, much of which is increasingly monopolized in terms of ownership anyway. Add to that the overwhelming influence of the financial service sector, and what is left is a country that buys more than it makes (and what it makes are increasingly capital goods as much as consumer durables and non-durables), and in which people increasingly use services rather than do things or rely on themselves.

The social division of labor created by service sector dominance in the US appears to produce two distinct cultural characteristics. First–and this is very evident in South Florida and a subject that I have addressed in previous posts–is a culture of blame-assignment and responsibility-shifting where nobody is personally accountable for the consequences of their actions. Even hardened criminals commonly use the excuse that their teachers, counselors and psychiatrists failed them in the lead-up to their crimes, and in many instances this suffices to mitigate their culpability and reduce their sentences. They are not alone in this. In fact, there is an entire service industry comprised of counselors, insurers and lawyers that profits from shifting blame and responsibility, criminal or not.

The second aspect is the increasing compartmentalization and personalization of service work, which in turn produces an erosion of horizontal solidarities brought about by common insertion in the productive process. Much of the service sector is characterized by individual entrepreneurial or material pursuits. The individualization of service work, often aided by stay-at-home technologies that facilitate the rendering of such services, removes the associational and emotive ties that are part of the working experience in mass productive enterprise. This atomizes and alienates individuals as social subjects, as their material fortunes no longer depend on common identifications and sense of purpose (which occurs whether the workforce is organized or not precisely because it is a collective enterprise).

Social group associations, service group size and individual immersion in non-work related collective undertakings such as sports and churches mitigate against a complete return to survivalist alienation, but they do not fully overcome the dissociative effects of the nature of service provision. The effect of this is to reduce the ties that bind people together, which helps explain the turn to shifting blame and responsibility onto others.

Needless to say, I am only extrapolating from what I am seeing in the US during my limited time here. I recognize that generalizations are fraught and speculation based on fraught and fragmentary generalizations are to be suspected. So take this appraisal as an opinion, nothing more. Moreover, the US remains the largest national economy in the world, the largest trading nation, and the largest manufacturing economy. Its information technology, robotics, telecommunications and aerospace industries are world leaders. Its automobile and construction sectors are on the rebound. It is by no means weak in spite of what I have outlined above.

Even so, the trend is disturbing (at least for those with an interest in the US). For small countries not intent on projecting power or devoid of natural and human resources, reliance on services as the mainstay of the economy is acceptable if not advisable. Competitive advantage in services may counterweight a lack of comparative advantage in productive resources.

However, it seems to me that if a large, militarily aggressive country with a global reach relies on services as its engine of economic growth rather than on value-added production, than it will find it increasingly difficult to hold the its position over time. I might be wrong and, like (but better than) the USSR, the US can continue to ride on the production associated with an immense military-industrial corporate complex that spins off technological innovation and civilian applications as a matter of course even as the overall presence of value-added manufacturing as a component of GDP decreases. But if that is the case, it seems a risky proposition for sustained growth and global prominence given that an increasing percentage of the inputs to that type of production are derived from external rather than internal sources.

Meanwhile the life coaches continue to facilitate personal self-realization, realtors hustle properties, lawyers litigate and asset managers channel money made from services into other services. Wall Street and Washington both believe that ongoing reliance on services for economic growth is sustainable and desirable. In broad economic terms, that is like equating a merry-go-round with a wheel. It is that merry-go-round that Obama, Romney and other US politicians are trying to fix.

Blog Link: Australia as a different type of BRIC.

datePosted on 09:39, August 15th, 2012 by Pablo

In spite of some serious dysfunctionalities in its party politics and potential problems with its economic growth model (heavily dependent on mineral exports), Australia is well on its way to becoming a regional great power. In this regard it shares macro-characteristics with three of the four “BRICs:” Brazil, India and Russia (the PRC has surpassed regional great power status and is no longer, in my opinion, appropriately categorized with the others). Although Australians may prefer not be grouped with the others for a variety of reasons, I take the notion of “rising middle power” as the starting point for a comparative analysis of Australia as a different type of BRIC.