Published in Insights, The New Zealand Initiative’s newsletter, 4 March 2022
Even in ordinary times, it is difficult to govern a country well. During a crisis, it requires much greater skill, experience and judgment.
New Zealand faces several crises at once. The war in Ukraine is reshaping the global order. The pandemic is raging. World commodity markets are fragile. Supply chains are under pressure. Energy prices are soaring. Inflation is rising.
Challenges, threats, and severe risks abound. But does New Zealand have the institutions to handle them? Does the government have the necessary capabilities?
The core economic agencies in Wellington do not inspire confidence.
The decline of economic competence at the Treasury under former Secretary Makhlouf is well documented. In responses to many requests under the Official Information Act dating over the years, we learned that Treasury had lost many of its most qualified economists without adequately replacing them.
In stakeholder surveys, perceptions of Treasury’s competence have also declined. In the most recent survey, in 2019, only 57% of stakeholders had confidence that the Treasury does its job well – down from 68% in 2017.
Over the past decade, Treasury has shifted its focus away from rigorous economic methods to more fuzzy ones. The confused Living Standards Framework has not just distracted the organisation from cost-benefit analysis; it has displaced it.
Though there are still pockets of excellence within Treasury, especially in its housing team, that cannot be said for other parts.
The Reserve Bank’s story is similar. The RBNZ has recorded an enormous increase in full-time jobs over the past few years. However, several key appointments were filled with candidates from unrelated backgrounds. Then again, the RBNZ nowadays also concerns itself with issues far removed from its core responsibilities.
On the RBNZ’s Monetary Policy Committee, the situation is the most bizarre. Members should be knowledgeable about macroeconomics and monetary policy. However, those with research backgrounds in these fields, are automatically disqualified for these roles. Apparently, this prevents conflicts of interest, but I am not aware of any other central bank in the world operating that way.
Last but not least, the Productivity Commission rarely contributes to the issues it was established to address. Sometimes, its current chair appears almost embarrassed to lead an organisation tasked with increasing overall prosperity.
With well-established institutions, declining staff capabilities might not matter much, at least in business-as-usual times. Yet these are no ordinary times.
New Zealand’s key economic agencies are facing a multitude of interconnected crises, probably the most serious in two generations. But they are ill-prepared for them. Lack of economic expertise has led them astray from sound analysis and alienated them from mainstream economic positions.
Without competent institutions, policymakers are flying blind at a time when they most need high-quality advice.
This is a summary of a presentation given to the University of Waikato’s Economics Forum 2022. You can watch the speech here.