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January 2000 Newsletter

The Institute for Private Enterprise promotes the cause of private enterprise and a reduction in the role of government. Subscribers receive copies of all publications including a monthly newsletter complete with attachments.

Contents
  • Big business waits for BHP v ACTU outcome
  • Victorian unions campaign - The common law answer
  • The myth of increasing job security again revealed
  • US Hispanics have lower unemployment rate than our total
  • BCA continues to support big government
  • Do free market leftists exist? Read on!
  • The ABC is almost faultless - but votes Labor
  • More global hot - air despite no summer

THE COLEBATCH EXCHANGES(CONTINUED)

BHP Versus the ACTU

Even allowing for the reduced relative importance of BHP, its move to put iron ore workers on individual contracts foreshadows a potential sea change in Australian I/R culture - hence the ACTU' s decision to lead the resistance. A number of other leading companies is known to be watching developments very closely and, if BHP succeeds, will likely follow suit. Thus, there is substantial potential for a major leap forward in the de-collectivisation of the Australian workforce if BHP succeeds (while increasing, still only 86,000 employees have individual employment agreements -or AWAs - and only 160,000 have directly negotiated collective agreements).

Continuing his unwavering support for the union line, Opposition Leader Beazley described BHP's refusal to engage in collective bargaining as "absolutely dreadful". Minister Reith has, however, rightly expressed public support for the company's attempts to reduce its costs. Reith has long argued that, if companies are determined to implement productivity-enhancing workplace changes, they are able to do so under existing legislation. This thesis does appear to hold for large companies with the resources to withstand a concerted union campaign of resistance.

However, even for such companies considerable uncertainties exist because both the AIRC and the Federal Court are full of ex-industrial lawyers/union officials whose sympathies lie mainly with the unions and who, given half a chance, will "interpret" legislation in the unions' favour. (Early on, for example, BHP ran into a problem when, having failed to take advantage of a "system" order allowing it to resort to the civil courts, it was refused a second order by the NSW Commission). The BHP move will thus also be an important test for the Workplace Relations legislation.

The policy of the police can also be important. By contrast with the utter failure of the Victorian police to apply the law on several occasions over the past couple of years, the Western Australian police took appropriate action (reportedly, with "surgical precision") to prevent union pickets stopping contract workers accessing BHP sites. Such picketing is illegal, of course, but that did not stop the Sydney Morning Herald describing the police response as "unnecessarily heavy handed"!.

For medium and smaller companies who cannot afford to stand up to union targeting, let alone the uncertainties of the existing "system" and police policy, risk-taking remains severely inhibited and this in turn keeps employment down.

Hence the need to radically change this "system".

Victorian Unions' Coming Campaign - The Common Law Answer

The existing "system's" inability to provide quick and adequate protection for employers is highlighted by recent and upcoming developments in Victoria. In the last few weeks of constructing the Docklands stadium, building unions were able to take advantage of the time limit on completion to blackmail employers into conceding a 36 hour week. This will now be used as a precedent in union bargaining elsewhere.

Premier Bracks has refused to intervene in this and other disputes in Victoria, such as that involving the shut-down of Yallourn Power, which supplies about 20 per cent of Victorian electricity. However, while such disputes are primarily a matter between employers and employees and Bracks is correct in avoiding direct involvement, that does not absolve his Government from the need to state a position on union actions, particularly as the latest economic analyses suggest that Victoria already faces a marked slow-down in investment.

Given the inadequacies of the existing system, unions clearly see potential for exploiting the Bracks Government's heavy unionist make-up (which includes a former high union official as chief adviser to Bracks). But Bracks cannot afford simply to stand on one side and call on "both the unions and the employers and the contractors to settle it", as he has done in the Yallourn dispute. The threat to Victorian investment prospects from union actions is an important matter for the Victorian Government - and Victorians generally.

It is all the more important that Bracks takes a position given that Victorian building and manufacturing unions are gearing up for a large scale industrial campaign which has clearly got business extremely worried. Reports suggest that this campaign will attempt to gain industry-wide concessions by targeting one company after another, starting with the most vulnerable. If successful, this will have national implications too.

What can employers do about this and what can Bracks say about it? As the existing workplace relations legislation and tribunal system do not provide assured and speedy protection to employers against illegal union action, the alternative is to go straight to the State Supreme Court and obtain common law remedies. Such action has become increasingly acceptable in recent years and was recently employed successfully by Ansett against the TWU's attempt to stop workplace reforms by that company. Astonishingly, employer bodies have not publicly advocated this as a response strategy and they do not appear to have established a fighting fund

to help individual companies which are targeted by unions.

Monetary Policy

By the time this is received the Reserve Bank will almost certainly have increased official interest rates and (less certainly) the FED likewise. These increases will have occurred despite the absence of any significant upwards inflationary pressure, at least in Australia. As my attached article of 21 December in The Australian pointed out, the national accounts figures for the September quarter suggested a continuation of the slowing trend which has been going on since early 1998 and it also indicated an unwanted build-up in inventories. More recently, the December quarter CPI revealed an "underlying" Australian annual inflation rate only just above 2 per cent and thus well within the target range of 2-3 per cent.

My anti-inflation credentials are, I think, second to none. I consistently argued for an early tightening of monetary policy in the 1980s, which the Reserve Bank equally consistently refused to implement. But circumstances are now quite different. Accordingly, for some time I have been arguing against increases, mainly because it is evident that we are going through a period of increased productivity growth which has actually been leading to falling unit labour costs ie labour costs have actually been exerting downwards pressure on prices. This has been examined in more detail in previous newsletters (see www.ipe.net.au) and I won't go over old ground here. However, as more increases may be in prospect under existing strategy, one additional point needs to be made in response to the defence of the "pre-emptive" increase strategy by Reserve Bank Governor Macfarlane in his statement of 29 November to the Parliamentary Committee on Economics, Finance and Public Administration.

Macfarlane stated there that, "to argue against it on the grounds that we should not act until our inflation forecast clearly exceeds 3 per cent would be to argue for a very 'stop go' approach to monetary policy Ö. This would virtually guarantee that such a move would be a large one."

However, in the best tradition of his predecessor, Macfarlane is setting up a straw man: nobody is talking about a situation where "our inflation forecast " (abstracting from one-off GST effects) "clearly exceeds 3 per cent ": assuming that such a forecast was credible, there would be little disagreement that a tightening should occur. Surprisingly, Macfarlane did not give the Committee a forecast for 12 months out (one would have thought that to be a basic requirement for a central bank that follows a pre-emptive strategy) but he did say that "our guess" is that the underlying CPI out to June 2000 will increase by only 2.25 per cent and that it will be "back within target a year later". Such statements, which are usually made on the basis of existing policy, seem themselves to undermine the case for increases.

It might be added that, even if inflation jumped suddenly to, say, 3 per cent pa, the required increase in official rates to respond to this situation would be relatively small and unlikely to cause a marked slow down in growth (the chance of any repetition of the experience of the 1980s, touted by one prominent commentator, is remote). What has been happening to market rates is also relevant, including in reacting to the sudden fall in the $A as this goes to press. In particular, while over the past year official rates have risen by only 0.25 percentage point, bank bill rates have risen by nearly 1percentage point ie monetary conditions have "tightened" by more than the official rate increase. In sum, while there is a risk in letting things run on, that risk is small in current circumstances.

Job Insecurity Has NOT Increased

During January a Morgan Survey and an excellent paper issued by Minister Reith convincingly demonstrated that, contrary to the propaganda put out by unions, perceptions of job insecurity have not increased since the early 1990s. In classic fashion, this "good news" went almost unreported by the media and its I/R reporters. Why? Maybe they were all on the beach - or could it have been due to "concern" that correcting past false analyses would have undermined either a major union argument for regulation, or required those journalists who have been following the union line to admit their errors?

The Morgan Survey is particularly interesting because it has been asking whether people regards their job as safe since the mid 1970s. Only in the recession of the early 1990s has the proportion answering "Yes" dropped below 70 per cent. In 1999 it was 74 per cent in Australia and 76 per cent in (deregulated) New Zealand. As the Reith paper shows, perceptions of job insecurity are closely co-related to the economic cycle.

The Morgan Survey also shows that nearly two-thirds of Australians are confident that, if they lost their jobs, they would quickly find another one. However, a separate

Morgan Survey indicated that 63 per cent think that Government is not doing enough to reduce unemployment, with 50 per cent saying the main cause is people not wanting to work. This suggests that, handled correctly, there is considerable political potential for Government to push ahead with reform of both the social welfare and workplace relations "systems".

US and Australian Unemployment in 1999

In 1999 the US achieved an average total unemployment rate of 4.2 per cent despite having considerably higher rates for Hispanics (6.4 per cent) and Blacks (7.8 per cent). Australia, of course, has no comparable-sized groups susceptible to higher unemployment rates. Yet our average unemployment rate in the last year of the twentieth century was a disgracefully high 7.3 per cent ie higher than the US rate for less-employable Hispanics and not much less than that for American blacks. Even if we had only achieved the total US rate in 1999, let alone the much lower rate for whites, we would have had over 300,000 less unemployed.

BCA Continues to Support Big Government

BCA is continuing its support bigger government. In an article in The Australian on 18 January, President Campbell Anderson argued that

"The GST is an important building block to arrest the decline in the revenue base from our indirect tax system, without which the tax base would have continued to erode and with it our ability to fund social programs".

The fact is, of course, that these "social programs" are in drastic need of pruning via a reduction in middle class welfare. That would open up the potential for the lower of the taxation burden for which the BCA should be arguing.

BCA is also a prime mover behind the Innovation Summit on 10-11 Feb - a classic oxymoron, if ever there was one! There will be the usual calls on Government to provide more subsidies for R and D and the usual failure to recognise that innovation depends fundamentally on whether the domestic institutional environment is conducive to entrepreneurial risk-taking.

Headline of the Month

The award for this month's best headline must go to the Fin Review for its "Free Market Leftist to Lead Chile" on 18 January - and the new guy is an American educated economist too! (Of course, leftists should support the free market because it is more equitable).

ABC Excels

In support of its claim for additional funding the ABC commissioned a Newspoll survey which produced the remarkable result that 87 per cent regard ABC TV programming as good and that 92 per cent see the ABC as a valuable service to the Aus community. This seems passing strange given that only a small proportion of the population actually watch ABC TV regularly! Perhaps the survey was conducted in the ABC tea room where a loyal ABC staffer was recently heard to admit that in her ten years at the unbiased body she had never met anyone who had not voted Labor!

Global Hot Air Despite No Summer

The failure of summer to eventuate in most parts of Australia has not led to any revisionism by the global warmists. On the contrary, the end of the millenium saw that group of ideologues attempt to bolster its case by claiming that the nineties was the hottest decade. However, as Australia's global warming expert interpreter, John Daly, has pointed out "this claim is based on the compiled surface record of global temperature, a record which is fraught with errors, inconsistent with both the satellites and sondes, and which is based on very poor, or even non-existent records from many regions of the globe. As to being the hottest decade of the millenium, this is a result of a very recent piece of revisionism which now denies, for political reasons, the previously accepted existence of the `medieval warm epoch' where global temperature was a degree or two higher than today. The satellites are now 21 years old, and the relentless passage of time with little or no trend evident in the satellite record is beginning to tell on the greenhouse industry. This explains their increasing use of hyperbole and overstatement."

John's excellent site (www.vision.net.au/~daly) has a graph comparing global temperatures measured by surface, satellite and weather balloon over the period for which satellite measurement has been operating. This graph (below) shows NO increase for temperatures measured by satellite and balloon ie the Earth's atmosphere has not been warming over the past 20 odd years.

balloon.gif - 8745 Bytes

Colebatch Exchanges (Continued)

Last month's newsletter (see www.ipe.net.au) included exchanges with The Age's, Economics Editor, Tim Colebatch, on interpreting the levels of expenditure and taxes in Victoria under the Kennett Government and pointing out that Colebatch had incorrectly interpreted Grants Commission figures. The newsletter also included a section outlining the uncritical coverage by Age journalists of a United Nations report which had wrongly claimed that there has been a decline in the share of least developed countries in world GDP. It further noted that, after former Commonwealth Statistician, Ian Castles, had a letter accepted pointing out the UN errors, Colebatch published an article which had only partially acknowledged Castles position and, at the same time, had displayed ignorance of latest Australian data showing no increase in income inequality between 1994-95 and 1997-98.

These (and other) developments have led to further exchanges with Colebatch on a range of issues. These exchanges are attached and require no further comment other than to draw your particular attention to Ian Castles' demolition of the Colebatch article. To date, Colebatch has made no further response.

 

THE COLEBATCH EXCHANGES

To: Tim Colebatch

I have been reading with considerable interest your non-ideological analysis of the New Zealand election and your explanation of developments in the NZ economy.

I note that you did not mention that, since the early 1990s (which reflects the post ECA period as well as other reforms), NZ's average unemployment rate has been below Australia's in recent years despite having much larger ethnic groups, and that its employment rate has been much higher too. Also, its per capita growth rate up to 1998 was above the OECD average and on a par with Australia's (see my report on The Case for Further Deregulation of the Labour Market, Table 15).The (mild) recession of 1998 was due to factors not related to the reforms.

I am puzzled by your statement that in 1970 NZ was ranked fourth in output per head by Maddison, not far behind the US. The latter's Monitoring The World Economy 1820-1992 shows that NZ was ranked twelfth out of 16 in 1973, over 30 per cent below the US. It certainly "lost ground" since 1973, but I doubt that it did so from the early 1990s up to 1998.

Regards

Des Moore

30 November



To: Tim Colebatch

Did you see Ian Castles letter in this morning's Age? Why is it that Age journalists keep on making factual errors of this kind? Regards Des 8 December



RESPONSE BY TIM COLEBATCH

Des

It would take me a full-time job to remain in correspondence with you! I think I've had six emails from you in the past three weeks, taking issue with me on about 20 points. I will do my best to reply.

A: NEW ZEALAND

1. First, the one point on which we unambiguously agree. My memory tripped me up on Maddison's ranking of New Zealand: it was fourth in the world in 1960, not 1970. But looking at Maddison's figures closely, what I should have said was that he ranked it 3rd in the world as recently as 1966.

2. Now, the disagreements. New Zealand's unemployment rate has usually been below Australia's, since time immemorial: that's nothing new. Its employment rate is slightly higher than Australia's - last year, 69.5 compared to 67.2, on the OECD's figures, essentially due to its better performance in retaining older workers - but surely the real point is that both countries are way off the pace set by the Scandinavians.

Its per capita growth rate was above the OECD's for three brief years (1993 to 1995), but on any longer-term comparison, has fallen well behind. The OECD estimates, for example, that from 1990 to 1998, NZ fell from 88 per cent to 84 per cent of OECD GDP pc (PPP measure). Australia rose from 104 to 108 in that time.

What happened in 1993-95, as Brian Easton, myself and others pointed out at the time, was that NZ went through a conventional macroeconomic recovery caused by a combination of strong export prices (eg dairy, beef and logs), drastic interest rate cuts in September 1991, the stimulus of higher immigration, and the unleashing of demand suppressed during the long recession, particularly in housing and the CBD building boom in Auckland. The only thing I believe the reforms added was some additional bonus on jobs from the Employment Contracts Act; but after three years of virtually zero job growth, even that has failed to be sustained.

3. On the 1997-98 recession, one reform certainly did play a causal role. It is widely agreed (even by Alan Wood) that one of the prime causes was the bungling of interest rate policy by the Reserve Bank. That in turn was a direct consequence of the reformers' (Douglas era) excessively narrow rewriting of the Reserve Bank's charter. (Woody wrote a very good piece in the Oz on this a year ago, contrasting the charters and performance of the two central banks.)

Des, I wanted to reply to all your points, but it's been a hectic week with my teammate off sick, and I am heading off on leave, so I think I will have to send you this and leave the rest. Just briefly:

4. I take exception to your snide comment below. First, because it is silly: the data is not so clearcut as to allow statements of that kind. As Maddison pointed out at the very seminar you attended, five regions covering 144 low and middle income countries have in fact moved backwards in the last 25 years. The data Ian Castles cites, as he admits, is valid only for the 1991-97 period - the period of European and Japanese recessions - and is contradicted by the World Bank data I cited covering a longer period, and by Maddison's data covering a longer period, showing that the gap is indeed widening, except for Asian countries. Does this mean Castles and you "keep on making factual errors of this kind''?

Second, it is absurd to expect mainstream journalists to be experts in measurement of economic development. They do not pretend to be. If you had ever worked as a journalist, you would be amazed at the breadth of material we are expected to cover. Of course most of us are not experts in most things we write about; few of us hang around in one place long enough to develop it. Your comments, and for that matter Ian's criticisms of journalists for writing perfectly fair reports of the UNDP findings, I find offensive.

5. You are right in assuming that you were not the ''home grown ideologue'' I was thinking of in the Maddison article: I had another Melbourne identity in mind, whose professional training allows him no excuse for making macho misrepresentations of our history!

6. On Kennett, I would like more time to go through it with you. But briefly, your argument still rests on the assumption that 1997-98 figures define the state of Victorian finances at the end of the Kennett government. I think it is absolutely clear that they do not. Stockdale brought down another Budget in 1998-99, and another one for 1999-2000. Both cut taxes - by $250 million, taken together - while keeping spending on a tight leash. You may disagree with my characterisation, but the point seems to me unarguable. When we get the 1999-2000 figures, you and I will both know the real state of Victorian finances at the end of the Kennett government, on the Grants Commission methodology, and I will bet that the revenue raising effort by then will be pretty close to 100. I will be interested to see, too, which side of the line the Commission estimates spending on government schools to be by then.

I would add that I know of no Victorian government, Liberal or Labor, that has accepted the Grants Commission's view of Victoria's relative cost advantage in supplying services, and I would have thought you had enough of the public choice theorist in you to recognise that the Commission has a vested interest in exaggerating such differences . . . That is why I think it is best to include both sets of data, actual spending and the Commission's estimates of need/effort.

Anyway, best wishes for the New year

Tim

18 December

RESPONSE BY IAN CASTLES

Dear Tim

This message is being copied to a wide potential readership, some of whom
may not have wanted to receive it. To those in the latter category, could I
apologise and add the assurance that I considered every name on the list
and thought that they might be interested?

Des Moore has forwarded to me a copy of your message to him of 18 December,
in which you say (a) that you find 'offensive' my criticism of journalists
for writing 'perfectly fair reports of the UNDP findings'; (b) that I admit
that my claim that the gap between the global rich and poor is not widening
'is valid only for the 1991-97 period'; (c) that my data is 'contradicted
by the World Bank data (you) cited covering a longer period'; and (d) that
my data is 'also contradicted by Maddison's data covering a longer period
showing that the gap is indeed widening, except for Asian countries'. The
Maddison data was, of course, presented at the Academy's symposium 'Facts
and Fancies of Human Development' on 8 November.

I respond below to each of your points. Before doing so, I need to make
clear that the subject of the UNDP findings, my own observations upon them,
and the World Bank and Maddison data is inequality BETWEEN countries. Of
course the subject of inequality WITHIN countries is also important, but it
is not the subject presently at issue. My comments follow seriatim.

(a) I said in my letter to 'The Age' (published 8/12/99) that the figures
cited by Gay Alcorn were wrong. You agree that they are, but find my
statement offensive because the journalist's report of UNDP findings was
'perfectly fair'. Why? If a journalist writes a 'perfectly fair' report of
a piece of special pleading by tobacco or forestry industry lobbyists, or
by Greenpeace or Friends of the Earth, is it offensive to point to errors
of fact in the journalist's account?

(b) I do NOT admit that my claim relates only to the 1990s. On the
contrary, my paper on 8 November, a copy of which you have, was explicit in
sourcing the estimates of the distribution of global PPP income in 1960
(yes, 1960) and 1991 to calculations 'by the UNCTAD Secretariat, based on
data provided by the Human Development Office, UNDP'. (I updated the
estimates to 1997, using the same methodology).

The UNCTAD data appeared on page 7 of the publication 'The Least Developed
Countries 1996', published on 16 April 1996. It showed that the share of
world income of countries in the top quintile was 64.4% in 1960 and 63.7%
in 1991. If the richest 20% of the world's population earned 64% of global
income and the other 80% shared the remaining 36% of global income in 1960
and in 1991 (and yet again in 1997, according to my calculations), your
pocket calculalator will tell you that the average income of the richest
fifth was 7.1 times the average of the remainder in all of those years.

On 16 July 1996 (i.e., exactly three months later), the UNDP released the
'Human Development Report 1996' in Ottawa. The news release for this
occasion was headed 'Human Development Report: Moving from 'Inequitable to
Inhuman''. The Report stated (p. 35): 'Between 1960 and 1991, the share of
world income for the richest 20% of the global population rose from 70% to
85%. Over the same period, all but the richest quintile saw their share of
world income fall.' These figures were based on exchange rate conversions,
although this was not mentioned in the PR handouts from UNDP.

Using your pocket calculator again, you'll find that the UNDP figures imply
that the average income of the richest 20 per cent of the world's
population grew from 9.3 times that of the remainder in 1960 to 22.7 times
in 1991. By shifting their measuring stick from the PPP comparisons used in
the Human Development Index to an exchange rate basis for the purpose of
measuring the 'gap', the HDR Office concocted a huge widening of the 'gap':
it would have been a pity to let the facts get in the road of that line
about moving from 'inequitable' to 'inhuman'.

(c) Your World Bank figures don't contradict mine. True, the growth of 1.9%
per annum between 1980 and 1997 of the countries that the World Bank
classed as poorest in 1997 (underline) is fractionally less than the growth
rate of 2.1% per annum over the same period in the countries that it ranked
as richest in 1997 (underline). But such a comparison is biased, and cannot
validly be used to draw conclusions about whether the gap is growing
because (A) some of the countries that are now in the richest group are
there precisely because their strong growth record has enabled them to
graduate from the middle group in the past 20 years; (B) some that were in
the richest group 20 years ago have slipped back to the middle group
because of their poor growth performance, and are therefore left out of the
comparison; (C) some of the countries that are now in the poorest group are
only there because their poor growth record has lost them the place they
formerly held in the middle group; and (D) the best performers among the
poorest group 20 years ago have graduated to the middle class and again get
left out of the comparison.

The correct comparison for your purpose is made according to whether
countries were rich or poor 20 years ago. On this basis, the growth rate of
the rich group would of course be much lower and that of the poor group
much higher. For example, Saudi Arabia's per capita income was higher than
that of any of the European countries in the Penn World Tables (PWT) for
1980: now it has dropped below them all and is not in the World Bank's rich
group. Neither is South Africa, whose per capita income in 1980 was higher
than Portugal's (now in the World Bank's rich group). The Republic of
Korea, which is also in the rich group now, ranked far below all of these
in 1980, and barely above Nicaragua, which is now in the World Bank's
poorest group. Nicaragua had nearly twice the per capita income of Egypt
and Indonesia in 1980: now the position is reversed. In fact, Egypt and
Indonesia (which are now in the World Bank's middle group) had lower
incomes in 1980 than Cote d'Ivoire (which is in the Bank's poorest group).
And so on.

(d) Angus Maddison's figures for the 1973-1997 period don't contradict mine
either, and certainly don't show 'that the gap is indeed widening, except
for Asian countries'. The countries in the five regions that he identifies
- i.e., the former Soviet Union, Eastern Europe, the Middle East, Africa
and Latin America - had widely differing income levels in 1973 and widely
different growth records betwen 1973 and 1997. The aggregate (underline)
performance of the 144 countries cannot therefore be used as evidence of a
widening global gap.

As examples of the range of difference, these five regions include: (A) a
number of oil producing countries which were rich in 1973 but have since
suffered large declines in per capita income (Saudi Arabia, Kuwait, Qatar,
United Arab Emirates and Venezuela); (B) several African countries which
were very poor in 1973 but whose per capita incomes have since grown much
faster than average incomes in 'the West': e.g., Egypt, Morocco, Tunisia
and Botswana; (C) several 'middle class' Latin American countries which
have also grown much faster than 'the West' in the past quarter century:
e.g., Chile, Uruguay, Puerto Rico and Trinidad & Tobago; (D) the 15
countries of the former Soviet Union, which were 'middle class' in 1973 but
have since suffered large declines in per capita incomes; (E) Brazil and
Mexico, whose combined average income per capita increased by 1.4% per
annum between 1973 and 1997 - a fast rate by any standards except those of
the past half century; and (F) most of sub-Saharan Africa, where very low
average income levels in 1973 did not rise at all during the 1973-97
period.
-------
I am surprised by your statement that it is 'absurd to expect mainstream
journalists to be experts in measurement of economic development ... They
do not pretend to be'. With respect, you do pretend to be.

I also have pretensions on this subject. I've read widely in the relevant
literature. I gave a paper on 'Measuring economic progress' at the Reserve
Bank's research conference 'Productivity and Growth' in 1995, and gave more
papers on this subject at the Academy's annual symposia in 1997 and 1999.
Before finalising my report on the OECD's PPP program in 1997, I had
discussions on the measurement of the real incomes of countries at the
Centre for International Comparisons at the University of Pennsylvania and
with economists and statisticians at the OECD in Paris, EUROSTAT in
Luxembourg, the IMF and the World Bank in Washington, the UN Statistical
Division in New York and national statistical offices in Canberra, Ottawa
and London.

Against this background, I am confident that my conclusion that the rapid
global economic growth of the past 40 years has been achieved without any
significant increase in inequality between countries can withstand the
scrutiny of experts. Unfortunately, it is easily knocked over by
journalists pretending to be experts!

I hope that some recipients may want to pass on to you their own assessment
of the relative merits of the UNDP claims and mine. In the light of this
message and any such comments you may receive, I also hope that you will
take an early opportunity to use your column to shed further light on the
distribution of global incomes.

With seasonal best wishes

Ian Castles
20 December

RESPONSE BY DES MOORE

Tim

Your message of 18 December arrived after I had printed my Newsletter for December which includes comments on issues you raised in your message of the same date. I was unable therefore to take those into account in my Newsletter, a copy of which you should have by now.

Here are my reactions to yours of 18 December.

New Zealand

You acknowledge that NZ's unemployment rate has been below ours but dismiss that on the ground that it has been the case for years. But doesn't there still have to be an explanation of why that has continued in recent years? The need for such an explanation seems all the greater given that the unemployment rate for Maori and Pacific Islanders is much higher than for NZ whites and that Australia has no comparable sized group that is less employable.

You also dismiss NZ's higher employment rate on the grounds that:

  1. It was only "slightly higher" than Australia's in 1998. However, the difference is equivalent to Australia employing another 218,000 in that year - not bad considering that 1998 was a (mini) recession year in NZ! (If we look at the post 1991 recession period as a whole, we find that NZ has been employing considerably higher proportion of the working age population than Australia throughout the period); and
  2. It is essentially due to a better performance in retaining older workers than Australia. But does that mean that the labour market deregulation played no role? Grant Belchamber claims that it is all due to NZ action in 1990 to start raising the entitlement age for pensions to 65. But as that is (and was then) already the Australian age (for men) it is difficult to see that it explains NZ's much higher employment rate for 55-64 year olds.

Later, you agree that the ECA provided "some additional bonus on jobs" but say that after three years of virtually zero job growth that has failed to be sustained. Certainly job growth has slowed considerably - but it still leaves NZ with a significantly higher employment rate and a similar unemployment rate even with the much higher rate for Maori, etc. Further, if the 4% growth projection is realised, NZ employment and unemployment will presumably improve further.

Next you say that, in any event, both countries are off the pace compared with the Scandinavians. One has to leave Sweden aside, however (it has higher unemployment and a considerable proportion of its employment is in government subsidised jobs -open unemployment and enrolment in active labour market policy and extraordinary education programs exceed 12 % of the labour force, according to the last OECD survey of Sweden). It is true that Denmark, Norway and Iceland appear to have better performing labour markets than either Australia or New Zealand. I confess to not knowing much about those countries' labour markets and any special influences, such as the government subsidised jobs in the Swedish case. I have heard that Norway's income from oil has partly been used to subsidise employment through the government sector, but I don't know the extent of that.

But these Scandinavians' better performances do not seem to me to undermine the argument that, as Australia is most like NZ, the UK and the US in terms of institutions and economic structures, and as we are hardly likely to adopt Scandinavian ways, it seems reasonable to compare ourselves with our three closest countries. On that basis, a reduction in our regulation to make it similar to their's might be expected to produce a similar performance in our labour market or, given our more literate work force, an even better one. (As you know, economic theory is putting increasing emphasis on the importance of institutional factors in explaining differences in growth, etc performances).

You are correct in pointing out that NZ's mini-recession seems to have importantly reflected too tight a monetary policy (though drought was not unimportant). I suppose one could argue (as you did) that, as the monetary policy changes were part of the economic reforms, therefore the reforms played "a causal role". However, there is surely a difference between the substance of reforms (in this case, having monetary policy target low inflation) and poor application. I donít think that many people disagree with the substance of the monetary reform.

I do not have readily to hand the latest PPP figures for per capita growth for NZ but you did not respond directly to my point of 30 Nov that, up to 1998, NZ's per capita growth rate was above the OECD average if one takes 1991 as a starting point. The PPP figures the OECD supplied me in 1998 showed that NZ growth averaged 2.0% per cent from 1991 to 1997 (the same as for Australia) compared with 1.3% for the OECD av. Of course, 1991 was a recession year for NZ - but so it was for Australia (our GDP per head fell more than NZ's in 1991) and for the OECD av, so it is a not unreasonable starting point.

If you have later figures readily to hand I would be interested to see them and bringing in the 1998 recession year will obviously bring NZ down. However, if it is correct that the recession was mainly due to poor monetary policy, that implies that the structural reforms were working well up to 1998 and, subject to any backtracking by Labour, NZ could be expected to get back on its previous improved growth path.

Global Inequality

Ian Castles has sent you some comments on your various statements on this and I have nothing to add (or subtract) to those except to agree with you that journalists should not be expected to be experts in every facet of economics. But when they don't have the expertise they should surely consult the "experts". For example, journalist are surely worldly-wise enough to know that just because a report is published by a UN body that doesn't mean that it is correct and that its conclusions should be checked with someone in the field.

Victoria

My argument about Victoria does not rest on the assumption that 1997-98 Grants Commission figures define the state of Victorian finances at the end of the Kennett Government. It rests on analysis of Victoria's relative tax severity and spending relative to standardised throughout the Kennett period of government up to (and including) 1997-98. Any such analysis consistently shows that Victoria's tax rates have been consistently above the average for the States and that its spending levels have also been either above standardised or only fractionally below. Yet any reader of The Age during this time would have formed the impression that the "slashing" of spending led to Victoria running services below average standard and that more needed to be spent on such services, the (unstated) implication being that taxes needed to be raised.

You say that the CGC figures for 1999-00 will show a different picture. I very much doubt that it will alter the general picture I have outlined. Even if your points were accepted they do not suggest that the change would be large, anyhow. Even if Victorian tax severity drops to 100, that simply means that is back to average and could scarcely warrant increases to fund additional spending.

Tim, I think you ought to be man enough to acknowledge that the basis of your analysis was wrong and, hence, your conclusions were not soundly based. Again, this is an area where you could have consulted some "experts".

Let us look to the new millennium for a new start.

All the best for Christmas.

Regards

Des

21 December