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Insights 39: 13 October 2017
Read Eric Crampton's essay on why New Zealand is an island of sanity in a mad world
Sam Warburton discusses road safety on The Project
Jenesa Jeram on The Spinoff: Is the nudge towards KiwiSaver a nudge too far?

Changing New Zealand's government
Dr Oliver Hartwich | Executive Director |
It is Friday, 13 October and I am not writing about the coalition talks.

We would have hoped to have a new government by now. But good things take time. And deciding on the new government is a serious task for the board of a minor party.

So let’s stop criticising New Zealand First for the time they take to tell us who our next Prime Minister is. Let’s instead ask why, in an ideal world, it should not matter too much.

This week, we learnt that Wellington City Council has made a good first step in this direction. As Newsroom revealed, the Council proposed a "city deal" to central government.

What sounds like a technocratic proposal has much potential. It could change government in New Zealand (without changing the government).

The idea behind the ‘city deal’ will be familiar to Insights readers. It is what the Initiative has proposed for a long time: To grant local government more autonomy. And to allow it to share in tax revenues generated in the local economy.

Wellington City Council’s proposal takes inspiration from Manchester’s city deal. The UK central government has granted Manchester freedom to run its affairs. The result is a vibrant and innovative local government. We wrote about it in our report The local benchmark.

Manchester council is now in charge of critical areas of government. It controls transport, housing planning, police, skills, education and health services. It can also borrow and earn income from its investments in infrastructure.

Wellington’s proposal also borrows from the Initiative’s work on special economic zones. Two years ago, we made a case for them in our report In the zone.

The gist of our idea was this: We should allow councils to opt out of national legislation and try their own rules. For example, Wellington could open itself to foreign investors. Instead of using the Overseas Investment Act, it could use a more permissive regime. To encourage good policy-making, we would then give the council some of the extra tax revenue.

Wellington Council’s city deal has much potential. It could change the way of policy-making for New Zealand. It would create more incentives for economic growth. And it would move power from central government closer to the people.

New Zealand First has often called for such a devolution of power. If they achieve that in coalition talks, it would be a legacy to be proud of.

Time to reform the Reserve Bank?
Amy Thomasson | Research Assistant |
In its 2017 Annual Report, the Board of Directors of the Reserve Bank refers to itself as “a unique governance body in the public sector”.

But unique is not necessarily synonymous with good.

Nearly three decades ago, Parliament amended the Reserve Bank Act. It enacted two significant changes to the Bank’s governance. It vested most of the Bank's powers in the Governor. It also reconstituted the Board as a watchdog to guard the public interest and protect the Bank’s independence.

As the Productivity Commission noted in its 2014 report, Regulatory institutions and practices, the Bank’s monetary policy function informed these changes. But the Bank’s current prudential regulatory roles now demand much more attention than they did in 1989. And yet, its governance arrangements have not changed since then.

The Productivity Commission says this reflects a tendency for legislators to graft powers onto existing regulators without giving due consideration to whether this necessitates a change in internal governance.

During its review, the Productivity Commission encountered public concern that the Bank’s single decision-maker model “concentrates too much power in one person and creates a risk of poor-quality decision-making”. This concentration of power is particularly troubling given that the only way the Board can effectively hold the Governor to account is to recommend their dismissal to the Minister of Finance.

Dismissal may be appropriate if the Governor misses monetary policy targets. But such a blunt accountability tool may not be suitable for the Bank’s wide-ranging systemic regulatory functions.

Many of those interviewed by the Productivity Commission preferred a model that is commonly applied overseas, where a small full-time executive board has decision-making power. A board of this nature allows a regulator to derive “the benefits of diversity of skill and experience" while reducing "the risk of dominance by one person”.

There is much to admire about the Reserve Bank. It has administered effective inflation targeting for 30 years and remained operationally independent.

But the mandate of the Reserve Bank has expanded in the last 30 years. It is high time to reconsider the Bank’s governance structure to account for that.

Unique is one thing, but appropriate is entirely another.

Unlearn this
Richard Baker | Research Director |
Going to sleep at night, in bed with a hot water bottle and a teddy bear, it is comforting to know that somewhere some academic is toiling away, advancing the frontiers of knowledge.
Associate Professor Ranjit Voola of the University of Sydney Business School has done this. He has announced that business must "unlearn" the purpose of business. According to reports, he said that business must stop its sole devotion to maximising shareholder value. Instead, business must make the “betterment of people’s lives” its key priority.
We must act immediately on this insight. If we do nothing to implement Professor Voola’s call to action then tomorrow, around the world, businesses will continue to feed, clothe, house, transport, entertain, equip, employ, service, tend, heal and protect billions of people. These businesses will be acting to generate profits for their owners and shareholders. This is intolerable.
Why should customers receive products and services that they want and need, at prices they can and do pay. Why should capital earn a return as a reward for the effort made and risks taken.  Scandalous indeed.
Such activity incentivises businesses to innovate and to produce better and cheaper products. This keeps their customers satisfied, their lives enriched. If we do not heed the Professor's call business will continue to do this.  Abominations like the smart phone, personal computer, diabetic pump and rechargeable battery will keep coming.
And what about those who invest in these businesses. One cannot allow them to invest in businesses that suit their preferences. It is better that they trust the managers to operate the businesses in ways that the managers alone choose to improve people’s lives.
The managers will also decide on whether to make a profit and how big or small it might be. Thus we will encourage more investors to invest in these businesses, over which they have no control, and which may not provide any return at all.
Putting this jesting aside, the only real way to “unlearn” the business purpose is to relearn and remind ourselves of that purpose. It is to deploy capital to legal, effective, accepted and desired ends. It is to generate expected returns to owners. It is to provide people with products and services that they need and that they want. It is to enrich society with innovation, productivity and progress.

Most of all, no better thing exists on the planet for “the betterment of people’s lives” than business itself.
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