Monday 29 November 2004

Hon Michael Cullen: Address to Social Development Symposium Legislative Council Chamber, Parliament Buildings, Wellington

It is my pleasure to welcome you to this Social Development Symposium, and particularly to welcome Dr Raymond Torres, who will deliver today’s keynote address. As Head of the OECD’s Employment Analysis and Policy Division, Dr Torres is engaged in work that can greatly assist this Government’s commitment to promote well being for New Zealanders based on high-skill, high-value jobs in a diversified, knowledge-rich economy.

The connection between social policy and economic growth is the subject of ongoing debate, both amongst academics and policy makers. At one extreme there are social policy analysts who view the economy as a large pie delivered magically to society’s table to be carved up and distributed according to some, usually rather static, notion of equity.

And at the other extreme there are economists for whom (to quote Margaret Thatcher) “there is no such thing as society, only individuals”, and for whom social policy as such exists solely to deliver an important factor of production (namely labour) to the market in the quantity and quality the market requires.

Such creatures are thankfully rare, although some of them may still lurk in the corridors of this complex. For the most part, it is accepted that social and economic policy have a kind of symbiotic yin-and-yang relationship.

Each makes compelling demands upon government, but requires difficult trade-offs from the other. Good social policy is, in the long term, good for the economy; although it is a source of short-term fiscal pressure, and its beneficial effects can at any time be dissipated by poor economic management.

Good economic management is, in the long term, good social policy since it provides the stable environment in which businesses can invest and grow, and provide rewarding jobs; although in the short-term economic policy can create social dislocation and its long-term benefits can be forfeited by poor social policy, in particular the failure to invest in public education and public health, and the failure to provide pathways out of poverty for those facing a legacy of disadvantage.

While it may be comforting to assert that the two spheres of policy are interdependent, what that commits us to is a difficult marriage of contrasting paradigms. The lion of economic rationality must be made to lie down with the lamb of community well being.

The challenge is to understand how they reinforce each other or thwart each other, and how to design policy instruments that enable us to achieve multiple objectives, monitor progress and fine tune policy settings.

In many ways this is an ideal time for policy professionals in New Zealand to be considering these questions. Periods of economic crisis and social upheaval such as we endured in the 1980s and 1990s are not conducive to this debate.

However, we have now enjoyed five years of sustained economic growth, leading to significant improvements across a range of indicators. Our labour market has performed well with strong periods of employment growth that has both absorbed current levels of unemployment, as well as people previously not in the labour force. Indeed, as a result, firms are finding it increasingly difficult to find employees with the right skills.

New Zealand’s current rate of economic growth is one of the highest in the OECD, but we still have a long way to go to catch-up with the rest of the world.

In social policy, the Social Report sets out how on most dimensions, New Zealand is doing well and things are moving in the right direction. There have been welcome increases in household income through the combination of a strong labour market and the re-assertion of social democratic policies which emphasise investment in public health and education, and the use of the benefit and tax systems to promote income security for those out of the labour force and for those in the labour force who are supporting families with children.

Even so, we have a ‘tail’ of underachievement or of people who do experience adverse outcomes. This tail is evident in areas such as the compulsory school system (both between and within schools) and in the working age population, though our tail appears to be no worse in these areas than other English speaking countries.

We are no longer trying to pull ourselves out of a hole; but we are asking ourselves some important questions:

In terms of the economy, how we can sustain our current performance in light of where the global economy is heading and in light of looming capacity constraints? Our challenge is to build a platform for a higher growth path, based on increasing labour force productivity through higher average skills levels, and the leadership of industries which leverage new technology and high value sectors such as creative industries, biotech, design, and ICT.

In terms of the health of our society, how can we overcome the problems of multiple disadvantage which, as we know, afflict a sector of the population that drives the hardcore end of social dysfunction in terms of crime, long-term unemployment and (to some degree) preventable ill health?

And in terms of both social and economic objectives, how can we sustain a quality of life (social, recreational, environmental) that ensures that skilled people want to live and make their contribution in New Zealand?

You will be relieved to hear that I am not about the answer these questions today. If I did, you would have no reason to stay for the remainder of the symposium.

What I do want to do is to suggest two challenges to policy makers in addressing these issues: one relating to substance and the other to process.

The substantial issue is how to develop a common language that straddles both the economic and social dimensions of the issues we face. One option is the language of productivity, which is an economic concept whose determinants are core social policy.

There are two sources of GDP per capita growth: labour utilisation (number of people working and hours worked) and labour productivity (output produced per worker per hour). Most successful countries have both high utilisation rates and high labour productivity. Social policy is an important determinant of both.

Labour utilization is, at the margin, heavily influenced by policies that remove or reduce the barriers to people getting into jobs, policies such as child care and income support through benefits and taxation.

This government’s Working for Families package is designed, among other things, to reduce barriers to workforce participation through improved childcare and increase the benefits from working to ensure that there is minimal wasted labour capacity (which in human terms means fewer people feeling that they are sitting at home not making the contribution they are able to make).

New Zealand already has high levels of labour utilisation, meaning that increasing labour productivity is a key determinant of economic growth. As the leading US economist Paul Krugman has put it:

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

All OECD countries with higher per capita GDP than New Zealand have higher productivity, while all OECD countries with lower per capita GDP have lower productivity.

From 1987 until recently, New Zealand’s average labour productivity growth was consistently less than that of Australia. More recently, our rate of increase has been similar to that of Australia at 1.7 per cent per year. Both New Zealand’s and Australia’s labour productivity growth are nevertheless still lower than growth in the UK and France.

Increasing labour productivity will require increasing skills in the workforce, and ensuring a close match between those skills and employers’ needs. That means an education system that motivates learners to achieve to the best of their abilities, that is informed by accurate information about what skills are valued in the economy, and that does not permit individuals to fall through the cracks and end up lacking essential foundation skills.

It also means relatively free immigration flows, and the various components of a quality of life that attracts skilled people and motivates them to do their best work here.

I would venture to suggest that our understanding of what drives productivity needs a lot more sophistication. We have econometric measures that tell us what is happening, but not necessarily why. What drives productivity? And what contribution do factors such as industry engagement with tertiary education, or improved workplace culture have in making productive people happier, and happy people more productive?

Beyond this substantial issue is the process issue of how to manage the implementation of a combined social and economic policy programme over the long term. For many of you here this is a major area of endeavour.

Value for money is a crucial issue, and is problematic given the long timeframes involved. The Government wants to match its increasing investment with real improvements in services. We want to have the best mix of interventions between early actions to prevent people (especially young children) going on to suffer adverse outcomes later in life, with services that support people who do suffer poor outcomes.

Sustainability of spending over time is also crucial, particularly in health and education. While there is much to do, our resources are finite and we have to make choices. We need better information about how to prioritise and how to sequence initiatives.

Getting good intra- and cross-sector collaboration is essential. How do we make sure that all our social and economic policy interventions are pulling in the same direction?

My suspicion is that what will make these management challenges easier is getting better evidence about what works in promoting the outcomes we want. Generally, we know very little about the efficacy of almost everything done across the social policy sectors. We can find information about the effectiveness of some individual programmes for tackling crime, improving housing, reducing inequality, or reducing the incidence of child abuse/neglect. But trying to identify the best portfolio mix is extremely difficult.

As a long lapsed historian of social statistics, I am well aware of mammoth task involved in multi-variable analysis in social policy. One can draw an analogy with the human genome project; except that in the ‘social and economic genome project’ we have not yet discovered an equivalent for the DNA molecule, and we have little hope of ever getting the subject to lie still under a microscope.

Nevertheless, that is the challenge. We are privileged to be able to draw upon the research undertaken by the OECD, and I look forward to what Dr Raymond Torres has to say. It will, I am sure, cast fresh light on the particular questions we are facing in New Zealand, and enable us to achieve those small, incremental gains in understanding through which we make important progress.

Thank you.

ENDS

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