Chris Nobbs: A promise that failed

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As several articles in the Herald in recent days make clear, the privatisation of publicly held assets continues to be a contentious subject in New Zealand. It is salutary therefore to place this national debate within the wider context of international economic experience.

Disinvestment in public capital assets, both fixed and human, has provided the cornerstone for the free-market economic policies that have dominated many Western capitalist countries (particularly member countries of the OECD, of which New Zealand is one) since the late 1970s and early 1980s. This disinvestment policy has had three major strands: asset privatisation, market deregulation, and the reduction in taxes and the retrenchment of social entitlements.

The core promise held out by those who have espoused these policies has been that they would enhance economic growth. Now that almost thirty years have elapsed since the introduction of this policy approach, much evidence has accumulated as to its consequences - particularly over its early years when it was most assiduously pursued. This evidence may be summarised as follows (together with representative references):

* Between the decade of the 1970s and that of the 1990s, GDP per capita growth declined in 21 of 26 OECD countries, including all the large economies for which statistics are available.

* Over the longer term, free-market economies have fared no better in terms of economic growth than have economies employing social democratic policies.

* From the mid-1980s to the mid-1990s income inequality in most OECD countries rose, and this rise continued over the period 1994-2005. These changes occurred particularly in countries dedicated to free-market policies. No such changes were evidenced in the social democracies of France and the Netherlands.

* While the stock of goods and services available to consumers in capitalist countries has risen in recent decades, average levels of citizen satisfaction has not. In the USA over 1972-1991, while real per capita disposable income rose by one third, NOP polling showed no increase in estimated happiness. In European countries only weak trends in happiness (up and down) occurred over a period when real GDP per capita rose between 25-50 per cent. Similar trends have been charted for Australia and other countries.

If happiness measures have remained static, a significant element of explanation is likely to be that the rise in incomes has been offset by the rise in inequality. Recent studies across a wide range of developed countries have shown that income inequality in society correlates strongly with an aggregate index of health and social problems. On the other hand these studies have found an almost zero correlation between national income per person and this aggregate index.

That it is income inequality that is at the source of the health and social problems is evidenced by the observation that if these were due purely to poor material circumstances, then richer countries would have less social problems than poorer, but this is not the case. If we suppose that individual happiness is inversely related to problems of health and social welfare, then income inequality is not only bad for those of low socio-economic standing, but is economically inefficient as well.

A consequence of the foregoing is that if New Zealand politicians and others wish to justify the continued disposal of public assets, they need to do so on grounds other than those related to economic growth, and in addition they need take into account the evident negative consequences of pursuing free-market policies in this area.

There is however an even more cogent reason why the free-market approach to the ownership and management of assets needs reconsideration. The critical global problems of the twenty-first century which economies are beginning to confront - of food and resource security, environmental degradation, climate change, population increase and population ageing - all have characteristics of economic 'public goods', which cannot adequately be accommodated within the orthodox economic framework of 'private goods'.

It is a tragedy that New Zealand adopted free-market policies at their inception with such enthusiasm (no country sold off a greatest percentage of its public assets as a proportion of GDP than did New Zealand), and it would be tragedy redoubled if New Zealand were the last country to realise that these policies are becoming increasingly less relevant and damaging in relation to the critical issues of the present century.

* Chris Nobbs is an economist, researcher, and New Zealand citizen based in Canberra, currently visiting New Zealand. His book Economics, Sustainability and Democracy: Economics in the Era of Climate Change will be published later this year by Routledge (UK).