1876 revisited?

The New Zealand Initiative was out this week with a new report, In the Zone: Creating a Toolbox for Regional Prosperity.

If I’ve understood correctly their proposal, local authorities would be able to seek approval from central government to run policy experiments in their own areas (freeing up the Overseas Investment Act, legalising drugs, prohibiting prostitution, banning private schools, introducing capital punishment, banning immigration –  or the reverse of each of these).

Frankly, it seemed to be a solution in search of a problem.  I’m all in favour of a bit of localised regulatory competition –  the sort of thing that was, for example, possible in respect of building and land supply in Auckland before the ACT Party leader legislated to merge all the councils in the Auckland region into a single body.    The authors rightly cite the advantages the US federal system offers –  data on all sorts of different approaches to doing things.  And I wouldn’t challenge that.  But the data from those experiments are widely available.  Same goes for the Canadian provinces, or –  nearer to home – the Australian states. Or insights from different countries within, say, advanced country groupings such as the OECD.   In fact, in many areas New Zealand ministers already participate in the Australian inter-governmental councils, sharing experiences.  Perhaps the report would have benefited from some Australian perspectives –  including on the relentless rise of the federal government at the expense of the states.

But as the authors note, New Zealand’s population is around that of a median US state.  And we’ve been along this way before –  the provincial governments that played such a major role in New Zealand government (in many ways more important than central government) until they were abolished in 1876.  Indeed, the NZI authors prompted me to pull down from the shelves my copy of Morrell’s history of the provincial system –  a system ended for a mix of good and bad reasons.

The authors are keen on regulatory competition, but pull back from favouring the re-establishment of provinces.  It isn’t quite clear why.  They argue that “a federal system could be too costly in a small country” but then note that

We risk too little recognition of regional differences under our current domestic policy settings.  New Zealand is not expansive enough in size or disparate enough socially or culturally to warrant having a federal system of governance.  But national level policies do impose challenges to regional growth that could be better addressed through regionally specific regulation.

In some cases, perhaps.  But it is only going to happen, to any material extent, if something like a federal system was established and entrenched.  In other words, if the ex ante power is genuinely given over to local authorities  And even then, in provincial/federal systems the interests and needs of Toronto or Sydney frequently differ from those of remote rural bits of Ontario or New South Wales.

To see the problem, take one of NZI’s proposals.  They argue that the West Coast local authorities could seek specific RMA amendments to better support mining developments. But why do they think that environmentalists in Auckland or Wellington would be more willing to see the law changed just because it would apply only to the West Coast?  People think of the West Coast as part of one country, their country, and those opposed to mining would fight tooth and nail against any legislation that central government sought to pass to create this specific regional dispensation.  The words “thin end of the wedge” will pop up repeatedly whenever one of these proposals is made.   CAFCA won’t be any more relaxed about freeing up foreign investment, just because the initial exemption is only for Wellington.

After all, as the authors suggest, the central government should only agree to dispensations it would be happy to see applied everywhere.  Quite how this discipline would be enforced  –  especially since each dispensation would presumably have to be legislated separately – is not made clear in the NZI document.  Nor how they would prevent an incoming central governments of a different political complexion simply repealing all regional provisions that they didn’t like.

And I don’t see why they think a federal system might be too costly but their system would be materially cheaper or better.  Their system seems to be a recipe for each of the regional councils, or possibly territorial authorities (of which there are almost 70), to grow their own bureaucracies, to identify better policies across a whole range of possible areas than those dreamed up centrally.  And since all these experiments would have to be approved (and legislated)  centrally –  unlike in genuine federal systems –  it isn’t clear that the NZI reform would not further increase the size of the Wellington bureaucracy.  Small countries can –  and do –  manage to succeed, but we need to recognise just how limited the stock of capable policy bureaucrats is in a small country.  In a country of 4 million people I’m not sure the case is strong for competing immigration (or drugs, or crime, or education, or…) policy managers in Invercargill, Gisborne, Christchurch and Auckland.

It all seems to involve a vision of capable well-intentioned people on both sides.  Actual politics is a great deal messier, with deals done to assist supporters or more general electoral prospects in particular regions.   And many differences on policy are differences of values –  and only a minority of those differences divide regionally.

The authors reasonably caution us against automatically regarding central government as competent and local government as incompetent. As they note, even central government put money into the debacle that was the Dunedin Stadium –  although amounts that were chickenfeed relative to the national budget.  And Think Big –  the energy resource development strategy from the 1980s –  certainly swamps any regional or territorial bad policy choices.  But there is something to be said for specialisation.  Local governments often don’t do the basics that well, and do worse the further they get from basics.  If, to take a local example,  two years after the storm, the Wellington City Council still hasn’t fixed a short local stretch of seawall, I certainly can’t count on central government doing so.

seawall

Local governments already seem too busy and self-important with grandiose ten year economic development plans – imposing visions of who should live where, in what sort of accommodation, or promoting uneconomic runway extensions.    Pandas anyone?   And for all the talk of greater flexibility of land supply, has any local council anywhere in New Zealand –  even where there is no huge growth pressure – gone to the limits of the current law in freeing up residential land supply?  The New Zealand Initiative and the Productivity Commission (in their new report yesterday) seem to have acquired a touching faith in local councils, frustrated either by their voters or central government –  but what that faith is based on is less than clear.

The authors enthusiastically cite the Shenzhen special economic zone.   We should always pause and reconsider when advocates for reform cite Chinese examples.  As a reminder, China is a struggling repressive middle income country  – where central government is firmly in control –  and whose economic performance over the last 200 years makes even New Zealand look good.  Oh, and that is before starting on the matter of the number of their own people policymakers have been responsible for the deaths of (whether in famine, civil war, or in utero).

Trials and experiments are, no doubt, good things.  But this NZI proposal does not look like one of those experiments that should be given a chance to fly.  I’m a South Islander by birth and inclination, and if someone proposed a genuine federal model for New Zealand –  South Island, lower North Island, and Upper North Island –  I’d probably be emotionally sympathetic to it.  But even then I’d refer supporters to the Australian experience, and wonder just how much genuine decentralisation would occur and for how long.  Fortunately, perhaps, the differences among the regions are not yet so great that people see their primary identity as regional rather than national.  Unless that changes, the big policy fights –  including over reducing the economic role of government –  will just have to go on at a national level, as they mostly do in Australia.

UPDATE:  I’ve been pointed to some similarly sceptical remarks by the Deputy Chair of Parliament’s Finance and Expenditure Committee made at the launch of the NZI report.  (Being a Wellington MP, he nonetheless seems disconcertingly sympathetic to the runway extension.)

18 thoughts on “1876 revisited?

  1. Thanks for this, Michael.

    Our hope is that it’s easier to get to, for example, RMA reform for parts of the country on a trial basis than it is to do it for the whole country at once, and especially where it comes from local demand. That changes the basic politics of it. Sure, some Auckland folks would still object to the West Coast doing its own thing, but it’s a much easier political sell for the Beehive folks to say “Look, we’re implementing changes supported by the local community on a trial basis” than it is to implement the change across the whole country.

    And while it’s certainly true that we have a darned good idea of what kinds of policies can work from looking overseas, those arguments do a lot less to convince voters than being able to take a drive and see how they’ve panned out within a place that they know.

    The problem we’re seeking to solve is that a lot of national-level policy changes have been ruled off-the-table as too politically difficult, and at the same time that local councils have weak incentive to facilitate local economic growth.

    You’re right that local councils are nowhere near the envelope of what’s allowed in terms of housing supply: their district plans, which are up to them, could be far more liberal, and they could do it entirely unilaterally. But think through the political economy, because that’s what we’re trying to change.

    Currently, the RMA processes for changes to district plans make objection pretty cheap, make change costly for councils, and don’t provide particularly good ways for councils to broker efficiency enhancing deals. If you wanted to get rid of, say, the heritage overlays that prevent changes to or densification of much of the area convenient to Auckland’s downtown, you’d buy a big fight with heritage advocates and none of the people who’d be benefited by the more affordable housing then made possible would turn up to the consultation hearing. If Council also had to upgrade the local infrastructure to handle any increased density there, the net financial case for the change, from the Council’s perspective, could be pretty marginal – and not worth their buying a fight over. Turn that around such that Council shared in the extra income tax revenue generated by the increase in the number of people who could live there, then it could be a fight worth their having.

    I also think we can take some national level policy problems out of the too hard basket by letting them be trailed at the regional level.

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  2. Thanks Eric

    I’m still inclined to think that Councils are (mostly) the problem rather than the solution (eg bureaucratic, ideological, preferences for “density” rather than “sprawl”) and am very uneasy about the NZPC wanting to aid and abet those preferences.

    I’m still uneasy about your fiscal ideas – esp what happens in a downturn – but need to spend some more time working through what you’ve been saying in various reports, and thinking thru the implications and risks.

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    • Agree that councils are a problem, but I think a lot of that is an outcome of the framework. For me the bigger question is whether councils can respond quickly enough to changes in incentives given the accumulated endowment of staff.

      The fiscal sharing mechanism we’d left deliberately vague because there are lots of ways of achieving the outcome, which way you choose will depend too on whether IRD is able to come up with reasonable estimates of aggregate tax tax from economic activity within each council, and I didn’t want to have to commit to any particular mechanism in this report – too far out of scope. There are a few obvious things that need to be dealt with: smoothing to avoid sawtooth incentives to juke earnings every other year; adjusting for year-effects and the like. If you’re running things through a decent “pay for above-expected growth” model, then a downturn is easy: so long as the council’s revenues are above forecast adjusting for national-level year effects, then they get a cut.

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  3. I haven’t read the full NZI report yet but what I have read was very well written, with loads of cracking good examples and links. I hope lots of local councillors and MPs read it.

    I’m inclined to think perhaps the central govt would need to ram through an initial demonstration SEZ somewhere in order to show local government what could be done.

    In terms of the quality of local government, we would probably get a better class of councillor and mayor if they had greater latitude to do stuff cooler than enforcing parking minimums. Also, you might be surprised at what you get out of some regional port cities if they feel enough pressure to create jobs.

    Would it be possible to offer tax concessions to export-oriented firms without breaching our WTO obligations?

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  4. You are an optimist.

    As Chris Bishop points out, local authorities were given powers of general competence a decade or so ago, so in principle local authorities can do anything not otherwise prohibited that voters don’t stop them from doing. The Dunedin Stadium was allegedly a growth strategy – I presume it on the old “build it and they will come” approach. I think the Wgtn airport extension dream is built on a similar premise.

    There is too much regulation, business taxes are generally too high, and so on, but in a small place like NZ these are better dealt with (challenged/debated) at a national level. As, mostly, they are abroad too.

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    • I see the Productivity Commission has a report out saying councils should be allowed to set volumetric charges for water and waste, road user charges and set taxes on land value. You would think these sorts of things might have been un-banned years ago.

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      • It is a mix. Congestion charges etc are banned, but not (eg) land value rating, which some councils still have. Not sure about water, but I know I opted into metered charging for water in Wgtn almost 20 years ago – so it can’t be prohibited across the board.

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      • This seems like the real issue here (following on from Eric’s comment above): if existing regional government structures are misaligned, then devolving power further down is obviously going to end in a smaller scale train wreck. I don’t know how it is possible in principle to run a government when your most efficient charging mechanisms are already ruled out by national fiat.

        Equally, the local franchise can result in a bit of a mess, and I believe that at least in Australia, local government voter structures can differ widely and can result in very different power structures and incentives for local politicians. I know from my own experience, the City of Adelaide’s electoral structure required the election of a mayor elected from every voter within the city boundaries, but also required the election of ward councillors who would represent a small mini electorate within the council itself. This meant some wards had very, very shallow pools of candidates, and even smaller voter bases for ward councillors. This arrangement virtually guarantees a niche loony candidate can get elected with often around a few hundred votes or less (as has happened consistently for as long as I can recall).

        In those environments, there’s little appetite or policy making literacy to try out any of this – and potentially more incentive to act in an even more populist and rent seeking way than at a national level with a broader and stabler political power base.

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  5. Sounds a very interesting report – so thanks Michael for alerting us to it.

    I think you’ve raised some really good points, but must read the full report first before commenting further.

    One thing I’d point out at this stage relates to that Dunedin stadium issue. Had it not been for the central government contribution – it would NEVER have gone ahead. The point is, as has been now proven over time, it never was a financially/commercially viable proposal, so the bulk of the capital had to come from the public purse. Dunedinites in voice as the local ‘public purse’ were far stronger in opposition to it, than for it. But no matter what amount of consultation was done on the issue (i.e., democratic decision-making) the people’s majority voice was ignored. Enter central government, “the saviour” – or more appropriately – the one that put the noose around the neck of Dunedinites for many years to come.

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  6. China has to be looked at in the context of Europe. China like Europe is a massive country consisting of many many countries with many many languages. Central government has to be strong and sometimes ruthless in order to maintain peace and security. When you worry about warlords in Iraq or Syria. Warlords in China historically had well organised and well trained private armies with 30 to 40 thousand men at arms. Bandits in China can number in the hundreds when a police station outpost is attacked.

    The PRC has certainly done well to lift a billion people out of poverty in recent decades, maintained a single national language and also maintained a single currency compared to the Euro that is breaking apart at the seams.

    Yes, they did achieve this with currency manipulation and yes also with US and international investment and corporate greed. But a very major and significant achievement. Look at the British Queen fawning over the Chinese premier laying out the red carpet and with pomp and ceremony.

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  7. I currently live overseas and see the effects where a handful of small “City” states continue to pass different laws & it leaves me thinking time & time again why didn’t make the changes at the national level.
    NZ is too small & already has too many local authorities. I have worked in local government in NZ and do not consider that the level of decision making and analysis is robust enough to consider a federal system.

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  8. the sort of thing that was, for example, possible in respect of building and land supply in Auckland before the ACT Party leader legislated to merge all the councils in the Auckland region into a single body.

    Lets get the facts right then before you get carried away.

    This was proposed by Helen Clarks mob and continued as part of National’s policy and when they who couldn’t get anyone from their poor collection of intellectually light weight MP’s to do the job, Rodney was given the task.
    A task the required him to form the legislation which the Lazy Nats. then kicked around to please their ends. ( e.g /Maori representation). In the end it was passed by the Nats. No one else could do that.

    Rodney would have been better staying away from the slime in the Nats.

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  9. Minister Rodney Hide says a single Auckland council will be empowered to get on with the job.

    Which they seem to be but not to many whingers liking.

    They of course elected the Mayor and councilors.

    It’s but a tiny town with years of decayed infrastructure, lousy town plans, in a stupid place.so all those that either held up its progress or were never charged sufficient rates to pay their way forward can stop complaining.
    People are moving there from all around the world so it can’t be that bad. Like the Govt. they need a full time razor gang to trim the nice to haves over the have to have’s. But that won’t happen forever.

    Never does.

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