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Latest news & views from market economics / June 2018

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Recent Decisions & Economics - Part 2

A social-market economy - a rising tide?

We may be seeing a rising tide of change in New Zealand, away from free market neoliberalism toward a more social-market economy. On Thursday last week, we had two significant releases, a decision from the Environment Court (protection of Okura’s natural environment) and new research from the New Zealand Treasury (Monitoring of Intergenerational Wellbeing). Both of these releases extend on recent decisions and research which together suggest some shift in government departmental thinking - and confirmation of past judicial views - around the benefits of unregulated market-based outcomes.

Since the 80s many democracies have favoured a policy focus on market-based outcomes, which is commonly referred to as neoliberalism. New Zealand has been no different, the concepts of deregulation, privatisation, free trade, reducing public services and simplification of taxes have all been applied by successive Labour and National governments. Neoliberalism was a paradigm shift away from the excessive government interventions in most parts of the economy during the Muldoon era (Keynesianism) toward more open unregulated markets. 

The proponents of neoliberalism would claim that policy changes over the last three decades have increased economic growth and incomes which has been a positive outcome for New Zealand. However, there is a growing concern that any benefits may not be fairly distributed and that in a range of instances unregulated markets have led to negative outcomes – for the environment, communities and cultures. A most topical subject is the worrisome failure of commercial (“free”) markets to deliver enough housing in total, especially housing which people can afford, to adequately meet the needs of society. This is particularly in high growth areas of New Zealand, following two housing price shocks since 2000. 

The concepts of social-market economy are well established in the Nordic countries, which by many measures have excelled when compared to the more neoliberal democracies. The social-market economy paradigm combines market-based outcomes with regulation and direct involvement (“intervention”) to achieve desired societal outcomes. The goal of the regulations is to alter the operation of commercial markets to acknowledge that there are important non-market implications associated with the operation of those markets – to address market failures whereby the operation of the market fails to deliver adequate price signals to businesses (such as the environmental costs of production, or the social costs of land banking).

Over the last three decades, New Zealand Treasury (and other government entities such as the Productivity Commission) consistently applied a neoliberal lens when assessing government policies. However, there is new research and guidelines from Treasury that suggest some shift in thinking towards the social-market economy. As well as the paper on Monitoring Intergenerational Wellbeing, Treasury has released its Living Standards Framework.

The Living Standards Framework research was begun in 2011 under the previous National government, but the Framework only became a core guide to economic policy advice under the current Labour government. The Framework encompasses, environmental, human, social and market resources. This shows much wider scope for policy evaluation than is outlined in the traditional Treasury guidelines, including those on housing policies. The Framework also reveals strong parallels with the Resource Management Act, with its focus on social and economic and cultural well beings and sustainable environmental management. 

Last week, Treasury released research which measures the well-beings outlined in the Framework. The purpose of the research is to extend the conceptual Framework to a meaningful measure that can inform Treasury’s economic policy analysis. This action by Treasury shows a significant extension of government departmental thinking, and as a guide to policy advice it is likely to bring a significant shift in perspective. 

At the same time, the Environment Court has again affirmed its focus on achieving the appropriate balance between market imperatives, and environmental, social and cultural values. During 2013 to 2016, the future directions of our two largest urban economies –which together account for about 43% of the national economy, and 65% of New Zealand’s total future growth – were examined through the Independent Hearing Panel (IHP) process. Auckland’s hearing was to set a new Unitary Plan following amalgamation of the previous TLAs, Christchurch’s hearing was to set out its recovery path after the 2011 earthquakes. Both hearings were held in the context of a major housing ‘crisis’. In Auckland the IHP’s focus was very much on providing housing capacity. 

While it did accept most of the IHP’s recommendations, Auckland Council pushed back against allowing houses to be built on a near-intact volcanic cone at Crater Hill, and on an area of high environmental value at Okura. Two appeals to the Environment Court were not long in coming.

The Environment Court rejected both appeals. It determined that significant environmental and social costs would not be offset by increases in housing capacity which would be very small in the context of the very substantial growth capacity provided by the Auckland Unitary Plan. In similar vein, in 2016 the Court upheld Mackenzie District’s ability to limit farm intensification in order to protect landscape and ecological values. The three cases each involved important non-market aspects on which the community places great value - the outstanding high-country landscape in Mackenzie basin, Crater Hills environmental values and cultural importance (especially to Te Ä€kitai Waiohua), and environmental significance of the Okura coastal area. 

All three decisions upheld the importance of those non-market values. In every case, the Court specifically rejected economic evidence which held to the neoliberal view that economic assessment should be constrained to market outcomes. In the Okura decision, the Court concluded “we find that non-market costs… should be taken into account in the overall economic evaluation”. The Court confirmed that the role of economists is to provide evidence on both market and non-market values which jointly provide a full picture of the value of a policy option. This both illustrates the breadth of the Court’s views on economic assessment, and highlights that the concept outlined by the Court is very similar to the Treasury Framework.

This apparent rise of the social-market tide in institutional thinking is to be welcomed. The wellbeing of society is not defined simply by market transactions or income. Rather, much of the New Zealand community’s wellbeing is driven by the non-market values of our environmental, cultural and social resources. Commercial development and market-based outcomes are important drivers, and can and should be harnessed to the benefit of society as well as individuals. Sensitive and sensible regulation can improve the benefits and help minimise the costs. 

Rodney Yeoman and Douglas Fairgray

Okura Estuary


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