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  • Robert MacCulloch

The Transmission Gully highway project out of Wellington has hit the headlines this week for being a scandalous waste of public money. When the Nats were in power, I lobbied hard for them to take the right approach to evaluating these kinds of big capital expenditures, as well as proposed regulations. Namely, to adhere to properly conducted, "cost-benefit-analyses" (CBA). This is how all serious countries approach such matters. By and large, the Nats were entirely disinterested in my exhortations. Their preference was to instead rely on the "discretion" of certain senior politicians as to whether such projects were given the green light, or not.


One of the projects which failed CBA when the Nats were in government, was the "Transmission Gully" project. The Dominion Post (below) reported at the time, in 2010, that "The Gully route has a benefit-cost ratio of 0.6, meaning the costs would significantly outweigh the benefits". That is, it should never have been built.


Until both of our political parties start taking a professional approach to economic management, expect more of these kinds of failures to occur.


For sources, see:

https://www.nbr.co.nz/story/unrealistic-cost-transmission-gully-not-news-transport-agency


http://www.stuff.co.nz/national/politics/3205082/Highway-upgrade-twice-the-price-of-Gully-route

I wrote an article for the NBR today. You can read it at https://www.nbr.co.nz/node/229780 or below:


Why do governments often fail to deliver the "best" policies for a country? One reason is that politicians may have other goals, related to their own self-interests. Another reason, however, is less cynical. Maybe our political leaders are mostly decent, well-meaning folk but they just don’t know what to do. Why? They could be incompetent. Which cannot be ruled out. Alternatively they could be receiving confusing and conflicting advice. This latter reason is the one most likely to explain why successive NZ governments have been unable to boost our exceptionally poor productivity performance. The truth is that no one knows why it so bad, let alone how to fix it.


What's the evidence for this claim? Take a look at the flood of views pouring forth from the Productivity Commission, as well as a host of other groups and organizations, including academics and think tanks. When John Key was Prime Minister, I well recall him being challenged at a “business leaders” event on the issue of weak productivity. He slickly responded how the Commission was arguing that our geographical isolation had hurt us on this front. Since it was outside his powers to relocate NZ to some place near Ireland, with Europe a stone’s throw away, the implication was that his government was not at fault.


It pains me to say so, but he had a point! The Productivity Commission has indeed bemoaned NZ's distance from our major markets. But guess what? It has also bemoaned how a bunch of industries are dominated by a few big players like in “supermarket, grocery stores and specialized retailing” which has suffered from “weakening competition over time”. And lamented NZ’s paucity of “frontier firms". Apparently these outfits spearhead innovation and help create "clusters".


And that’s not the half of it. Kiwi business has a high proportion of small and medium enterprises which may not benefit from economies of scale. Maybe our domestic market is just too little. We export less than most other nations of comparable size. Could that be an issue? But then again, perhaps our education system is not properly developing skills, observes the NZ Treasury. The apprenticeship system should be strengthened. Could it be we’ve not attracted enough high skilled immigrants? Or are we doing too much low end production instead of high value added manufacturing? It doesn’t stop there. The Productivity Commission has emphasized that "capital deepening" should become a priority. Our infrastructure is not up to scratch.


Hang on. Other experts say our low savings rate is relevant. That our tax system is skewed toward promoting property investment. Maybe Kiwi culture is to blame, courtesy of the tall poppy syndrome. Could our welfare state encourage idleness? By the way, our share market capitalization as a proportion of GDP is way less than in places like Australia and America. Could that be playing a role?


Another suspect is burdensome regulations. On this note, how the Commission could write a 540 page hugely expensive report a few years back, whose aim was to “Improve the Design of Regulatory Practices”, yet which did not have a single reference in its recommendations to the desirability of subjecting rules to a “cost-benefit-analysis” is beyond belief.


Get the picture? Everything under the sun has been blamed for our weak productivity record. Oh, and the sun itself could be responsible, since our temperate climate means that instead of getting too stressed for a boss hell-bent on higher output, a better option in NZ is probably to go for “work-life” balance, with emphasis on swimming and fishing. On this note, the new Head of the Productivity Commission has piled in, arguing that greater well-being makes people more productive, so taking time out on Friday afternoon to chill out may increase efficiency next Monday. Give the workers more holidays.


We've just recited over fifteen possible reasons that a motley crew of ‘senior advisers’, ‘top Treasury officials’, ‘distinguished experts and academics’, well-known media commentators, consultants and ‘high-level’ bureaucrats have put forward to explain our low productivity growth. Faced with no primary culprit for which irrefutable evidence exists, our political leaders appear to have given up on the matter. They’ve been left baffled and confused by a cacophony of voices singing from different hymn sheets.


What further muddies the waters is that the United States and many other Western countries have also begun experiencing productivity slowdowns. Some overseas commentators are blaming population ageing. The baby boomers are retiring.


Others are saying that technological progress is diminishing. That the improvement of the iPhone 12 over the iPhone 11 is small compared to inventions like the telephone, light bulb, motor car and refrigeration that were happening at the dawn of the industrial age, causing productivity to explode. Sure the Tesla seems like a great new innovation, but it still performs similarly, aside from emissions, to the cars that we’ve already got. It hardly compares to the scale of change in the 1910s when people sold their horses to buy Model T Fords. And when Pan Am became the launch customer of the Boeing 747 way back in the 1970s, it flew those jets at similar speeds to the ones today.


Where does this leave us? With the truth. No-one knows why our productivity growth has been so low. As a result, a solution remains elusive. It’s been stated by folks associated with the Productivity Commission that researchers have “moved on” from the view that NZ has an unexplained “productivity paradox”. That they know the answer now.


So let’s say the Minister of Finance asks “ok … if that’s the case, what’s the most important thing we need to do to raise productivity?” On this tenth year anniversary of the creation of the Commission, I challenge its new Head to tell us what it is.

 

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Robert MacCulloch