By Michael Reddell 22/10/2015


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.

New Zealand’s provincial governments

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.

Competent/incompetent?

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 count on central government doing so.

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 China example

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.)