January 22, 2013 | by MAX RASHBROOKE
In New Zealand, a widening gap between the rich and the rest threatens many of the country's greatest strengths, writes Max Rashbrooke, who argues for a new settlement of welfare.
During the last three decades, New Zealand has undergone a startling transformation, from a conservative, largely monocultural society with a heavily protected economy to a modern, vibrant, bicultural country with one of the world's most open economies.
Through this period of great change, New Zealand has – as the country's Sustainable Governance Indicators (SGI) testify – maintained many strengths. Our government is unusually transparent, our press for the most part free and fair, our elections relatively free from corruption.
Yet something is not quite right. As the SGI country report notes, "[New Zealand's] free-market reforms have not yielded the improvements in productivity, economic growth and living standards that were anticipated and promised by reformers." Indeed we have been rapidly falling behind the rest of the world for the last three decades. We remain wedded to low-value primary product exports, our productivity growth since the 1990s has been weak, and we no longer enjoy one of the world's best standards of living, as we did back in the 1960s.
We also have very grave social problems, notably a highly segregated school system, appalling rates of preventable Third World diseases, low-quality housing, and an extraordinarily bad record on child health and abuse.
Much of our difficulty, both economic and social, can be laid at the door of something that accompanied the free-market reforms of the 1980s and 1990s: the world's greatest increase in the gap between the rich and the rest. New Zealand has traditionally been an egalitarian country, but since the 1980s, the incomes of the very richest have more than doubled, while those in the bottom 10 per cent are no richer than they were in 1987, and average income earners are better off only because of government subsidies.
This gap has come about through cutting taxes on the wealthiest, reducing benefits, introducing light-handed regulation on businesses, failing to invest in key services such as state housing, and reducing the power of trade unions. This has shifted economic power from workers to investors, so that the gains of productivity are no longer evenly shared. The average hourly wage, if it had increased in line with productivity since 1990, would now be over $31; in fact it is just $24.43.
Democracy Could be in Danger
This gap between the rich and the rest has many damaging consequences. While we still score well on international education comparisons, we also have one of the biggest achievement gaps between top and bottom students, as poor families struggle to give their children a good environment in which to learn. In health, rates of diseases normally associated with Third World countries, such as rheumatic fever, have skyrocketed here (while falling in most countries), in large part because we allow many of the poorest families to live in cold, damp, badly insulated houses.
We also have the developed world's sixth highest rate of imprisonment, after the United States; high prison populations are a natural consequence of a divided society, in which people who lack common experiences are more likely to seek to punish than to pursue more effective policies around rehabilitation and community service.
In all these social problems, our ethnic minorities – the indigenous Maori population, and many Pacific Island families – suffer disproportionately. Maori and Pasifika rates of preventable disease, literacy levels and employment are all much worse than the national average, as they bear the brunt of poverty and widening income gaps.
Economically speaking, inequality is a drag on the country in many ways. It concentrates deprivation in particular suburbs, creating communities largely cut off from mainstream economic opportunities. It leaves many children growing up in – and permanently damaged by – poverty. It deprives poorer families of the income they need to invest in their children's success, and middle income earners of the capital they need to become entrepreneurs. It weakens demand – and thus business investment – by taking money from the poorest, who typically spend all their income, and giving it to the richest, who save 15-25 per cent of their income.
New Zealand remains a relatively cohesive society, but there are good reasons to fear that will change. Given the evidence that widening income gaps damage trust and social cohesion, New Zealand looks set to become an increasingly dysfunctional country. That could damage, among other things, our high rates of voting, the neutrality of our election processes, and the impartiality of our public sector – all things that rely on widespread citizen participation, and which are easily corrupted by the influence of wealthy interests. Our democracy is not immediately in danger, but it could well be.
So What To Do?
Recent history offers some lessons: throughout the 2000s, income gaps remained largely stable, and even fell slightly, thanks to the introduction of a wide-ranging tax credits system known as Working for Families and modelled on American and British equivalents. But since the global financial crisis, inequalities have begun to rise again.
This widening trend has prompted renewed interest in income gaps, and growing calls for something to be done to tackle the problems. Like most countries, New Zealand has a range of options when it comes to closing the gaps.
It could follow the OECD's prescription, which revolves around better jobs and more efficient tax systems. That would include greater investment in labour market and retraining programmes (where we have much to learn from Scandinavian systems), tackling what the SGI programme rightly identifies as a woeful record on research and development, and strengthening labour laws so that part time, casualised and informal workers get the same protections as others.
It would also involve a capital gains tax, to address the strange anomaly that makes New Zealand one of the few developed countries not to tax income from selling assets in any meaningful way.
A more radical approach would seek to tackle both our economic underperformance and unequal incomes by reshaping the world of work. Many of the world's most successful economies – including those of Germany and the Scandinavian countries – have systems that give ordinary staff a greater role in running their companies, whether through centralised bargaining, workers' councils or other means of encouraging 'worker voice'. Building on this approach, we could put staff representatives on company boards and, in particular, pay-setting committees.
These mechanisms would not only create greater scrutiny of pay arrangements and lead to a more equal income distribution. They would also boost our economic performance, by creating a workforce that feels more valued and engaged, and is thus more productive. A large body of international evidence shows that companies that engage staff in this way outperform their rivals.
A New Settlement for Welfare
These two approaches – the OECD idea of investing in workers, and the high engagement philosophy for workplaces – could be complemented by a new settlement for welfare. New Zealand's recent history has been marked by an increasingly punitive approach towards beneficiaries, despite evidence of their strong work ethic and desire to fill jobs if they are available.
A more humane – and ultimately more productive – approach would be to invest in them as well, by increasing benefits to enable them to participate better in society, and by matching that with greater investment in personalised retraining and job placement programmes, in order to tackle the low skills that prevent many from rejoining the workforce. This could be funded by higher – and thus fairer – taxes on those who have done well while enjoying the benefits of our common investment in roads, healthcare, education and other public services.
We are fortunate in New Zealand that we have a strong base for tackling these complex issues. We don’t have the high levels of disengagement, and the hopelessly partisan politics, that bedevil – for example – the United States in its current attempts to reign in spiralling levels of inequality. But it will nonetheless take a huge and concerted effort to combat the insidious effects of widening inequality – without sacrificing the real gains that have been made in the last 30 years.
Max Rashbrooke is a journalist and author working in Wellington, New Zealand, where he writes about politics, finance and social issues.