Wednesday, June 1, 2011

Will NZ Treasury's living standards framework achieve its goals?

Last week the New Zealand Treasury released a paper providing a ‘living standards framework’. Treasury describes it as ‘a descriptive framework of the factors that it considers are essential to national well-being’.

In launching the framework the Treasury Secretary, John Whitehead, certainly did not try to hide the fact that an important objective of the exercise, as he sees it, is to bring about a shift in the way NZ Treasury is perceived externally. He said:

‘Misperceptions of the role Treasury has played since the 1980s have limited our ability to be persuasive when talking about what matters most for living standards. Some have never got beyond believing that we are the root of all New Zealand’s economic evils. Others see us as little more than the defenders of fiscal virtue …’.

I find that baffling. In the 1980s the NZ Treasury played an important role in saving that country from economic ruin. Why is that not more widely understood and appreciated in New Zealand? That is something about New Zealand that may be beyond my understanding. So I think I should confine myself here to looking at the living standards framework in its own terms.

Treasury states what the framework is intended for as follows:

‘The Framework is intended to help Treasury consistently provide Ministers robust, theoretically-grounded and evidenced-based advice that aims to improve the lives of all New Zealanders.’

Yeah, OK, but what is the intended purpose of the framework? Treasury sets the general context by stating its overall goal as being to work for higher living standards for all New Zealanders. Seen in that context the purpose of the framework must be to monitor progress toward higher living standards of New Zealanders. However, I can’t find the purpose stated in such terms in the document. In fact, as I discuss a little later, the concept of progress doesn’t get much attention in the document.

What factors should Treasury look at in monitoring progress toward higher living standards of New Zealanders? The answer given by the framework is to look at a broad range of material and non-material determinants of living standards, including: conventional measures of income and wealth; freedoms, rights and capabilities; and self-assessed subjective measures of wellbeing (as a cross-check). The other two factors to be looked at are: the distribution of living standards across different groups in society; and the sustainability of living standards over time.

It seems to me that the use of sustainability as a major heading puts a rather negative focus on the whole exercise – assuming that I am correct in suggesting that the intended purpose is to monitor progress toward higher living standards. An analyst who is asked to assess whether current living standards are sustainable will consider some important issues, but is unlikely to give much attention to the question of whether living standards are improving to the same extent of those in comparable countries and if not, why not. I can understand that a lot of people in New Zealand would respond favourably to the word ‘sustainability’, but it should be possible to accommodate their legitimate interests within a discussion of factors affecting progress toward higher living standards.

The Treasury’s emphasis on sustainability rather than progress is relevant to concerns I raised in my last post, which was about the OECD’s ‘better life index’. In that post I expressed concern that if well-being indicators suggest that people in a country like New Zealand tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government concerned to become complacent about establishing conditions more favourable to further improvement of living standards. The Treasury’s living standards framework does not dispel that concern.

I don’t have any great concerns about the other factors that the Treasury is planning to monitor. However, there are a couple of omissions that seem to me to be significant. First, in considering subjective well-being, in my view attention should be given to perceived improvements in life over the last five years, which can be calculated from Gallup World Poll data. The concept is discussed briefly in an earlier post on this blog. During the first decade of this century the perception of improvement in life of both New Zealanders and Australians seems to have been somewhat greater than was usual for people in other countries with comparable economic growth rates.

Second, it would be hard to find a better indicator of relative living standards as perceived by New Zealanders and Australians than net emigration to Australia. Net emigration to Australia seems to me to be a highly reliable indicator because the preferences that people show about where they live must be heavily based on their assessments of living standards. Figure 1.2 in the second report of the 2025 Taskforce (p. 16) shows net emigration to Australia has increased broadly in line with the growing income gap between the two countries since the 1970s.

Before finishing I want to comment on the capital stocks and flows approach adopted in the paper. It seems to me that this approach provides an extremely useful framework for considering relevant issues. My overall view is that, despite some shortcomings, NZ Treasury’s living standards framework is generally OK and most of the background material is informative and well-written.

John Whitehead has given his permission for me to publish the following response:

‘I appreciated your article. For the record, I wasn’t saying that many of the attitudes about what we (I definitely include myself) did I the 1980s were necessary correct, just that they existed. (In fact I made the point in a television interview the same week that I thought the steps we took were broadly the right ones, although we certainly learned from both errors and successes on the way through. ) My point – missed in a lot of commentary – is that Treasury has for a long time taken a broader view of living standards than we are usually credited with: the stocks and flows framework etc was an attempt to describe this more explicitly. The media of course has largely ignored this point, claiming instead that it is some kind of (dramatic) shift.’

I had intended to publish that response without comment, but I want to note for the record that on the basis of my own personal experience I support John’s claim that NZ Treasury has for a long time taken a broad view of living standards. When I worked there as an advisor in the early 1990s one of the issues I was asked to work on was factors affecting social cohesion, including widespread opportunity, security and respect for institutions. That work led, indirectly, to my interest in some of the topics that I pursue on this blog.

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