TVNZ’s special programme on Tuesday (News Special: You, Me and the Economy; 25 November 2025) included (about two-thirds of the way into the programme) among a number of helpful and unhelpful suggestions, a call for New Zealanders to get onto the compound interest bandwagon, the magic formula of getting rich in the never-never through thrift. Jam tomorrow, never today; which seems to be our main narrative towards fixing the West’s economic woes.

The spokesperson for compound interest on the program sort-of acknowledged that ordinary compound interest (ie “conservative” compound interest) was hardly good enough; she pushed for an amplified “high growth” version of compound interest.

She was correct, if understated, on her point about conservative returns.

Ordinary Compound Interest

If we go back 100 years, to 1925, the equivalent of today’s minimum wage was $120 per year. If a person saved $120 then, and allowed it to compound (say in the form of a one-year bank term deposit) through to 2025, an average after-tax interest rate of 4.23 percent would have been required to make that ‘investment’ worth $7,540 today. $7,540 represents compounded CPI inflation over those 100 years. Thus, in principle, $120 (actually £60) would have had the same purchasing power as $7,540 today. In reality, the average term-deposit interest rate over the last century was well under 4.23 percent before tax, let alone after tax.

(We note that tax on interest is charged at a person’s marginal rate – commonly known as the secondary tax rate – and is nowadays withdrawn at source. For most of the last 100 years, tax on interest was more easily evaded, and it was paid separately, meaning that the compounding appeared to relate to before-tax interest income.)

In 1925, $120 per year supported, in many cases, low-income families. Imagine any family trying to live on an annual income of $7,540 today! The better way of evaluating past compound interest is to compare the compounded present value with today’s annual minimum wage, which is $48,800. For $120 in 1925 to compound to $48,800 in 2025, an average after-tax interest rate of 6.2% would have been required. That’s vastly in excess of what term deposit interest rates actually were, on average.

We should note that an average interest rate of seven percent would have compounded the $120 term-deposit to $104,000 today, and that an average interest rate of eight percent would have compounded the $120 term-deposit to $264,000 today. So, the magical exponential outcome of compound interest can occur, but only if the interest rate is sufficiently above inflation (ie above the compounded growth of prices); or, more pertinently, sufficiently above the compounded minimum-wage rate.

Other starting years

My calculations show that if the approximate minimum wage was invested in 1935, an after-tax average interest rate of 7.1% would have been required to achieve today’s minimum wage. (Wages were about twenty percent lower in 1935 than in 1925.)

In late 1970, I was earning seventy cents an hour milking cows every Sunday morning. That was about the minimum wage then. In 1980 I was in a well-paid IT job, earning $13,000 per year, which was more than double the before-tax minimum-wage-equivalent of the time. I have estimated annual minimum-wage equivalents for those years of $1,500 (for 1970) and $5,000 (for 1980).

For $1,500 in 1970 to compound to $48,800 in 2025, an average interest rate of 6.54% would have been required. For $5,000 in 1980 to compound to $48,800 in 2025, an average after-tax interest rate of 5.19% would have been required. (For the 1980 example, a before-tax annual average interest rate of about ten percent would have been required for such 1980 savers to have achieved three times today’s minimum wage.)

For a $30,000 term deposit in 2015 (again, set close to the minimum wage), an average after tax interest rate of five percent would have been required to compound that amount to today’s minimum wage.

Today’s one-year term deposit rate is 3.4% before tax, 2.4% after tax (applying a secondary tax rate of 30%). A $30,000 minimum-wage term deposit in 2015, compounded for ten years at today’s rate, would now be worth $38,000; well under today’s annual minimum wage (for a 40-hour per week job) which is nearly $49,000.

In the last 80 years, many people did make investment fortunes; but through property and other debt, not through saving.

Target Audience

We note that the target audience for this compound-interest narrative is young adults, because compound interest – like Mainland cheese – takes time. Most young adults in New Zealand today can only afford to save in this way if the money is taken from them ‘at source’ (eg through KiwiSaver), and then (if they are trying to live independent lives) they have to incur higher levels of debt than they otherwise would to be able to make those obligatory savings. Further, employer contributions to KiwiSaver are very much a part of the cost of labour, and are therefore factored in with employers offering lower wages than they otherwise would; after-tax employee remuneration is just a part – albeit a large part – of labour cost.

“High Growth” Compound Interest

The above simple mathematics show why the savings industry is trying to push products that simulate high-growth compound interest. In the years before 2008, and in the mid-2010s, these products rode the property bubble wave. Those ‘investments’ now appear rather naïve. But the industry of professional optimism always looks forward; it almost never looks back.

Today, amplified compound interest is (allegedly) being achieved through riding the world’s stock markets, with an emphasis on military stocks and ‘tech’ stocks (especially those of the ‘AI’ companies), and on cryptocurrencies. The ‘tech’ stocks (which the New Zealand Super Fund is highly exposed to) are one modern-day equivalent of mining-company shares; shares which historically have been amongst the most volatile. And crypto-currency mining is the virtual – and equally unsustainable – equivalent today of gold-mining as in the days of the Klondike, Ballarat, and Tuapeka gold-rushes. (Re gold rushes, 2025 is a global gold-rush year, though the years of the individual undercapitalised goldminer-made-good are in the past.)

Speculations on AI, Bitcoin, or African gold are no more routes to financial security or future abundance than is prosaic money-losing compound interest.

What are they thinking?

Compound interest without compounding economic growth.

We have to think about the compound interest narrative in two contexts, that of a static economy, and that of a perpetually growing economy.

The basic idea of a static economy is that there is no inflation nor economic growth. To keep it simple, imagine no population growth as well. And no taxes.

The mathematics of compound interest in this case are real. If you were able to save a sum of money and to wait for it to compound at two percent per year, you would more than double your money after fifty years, and increase it tenfold in less than 120 years. These gains to you and your entitled grandchildren would be fully funded by some other people and their impoverished grandchildren; every dollar of interest received is paid by someone else. It would be a zero-sum game for society; for every winner there would be a loser.

To propose compound interest like this sounds ludicrous, and it is. But, the whole object of monetary policy in New Zealand and like countries is to create a world in which the rate of interest is about two percent higher than the rate of inflation. That is precisely what I have described here. To achieve that goal, monetary policy ends up creating a structural recession, a perpetual state of zero economic growth; ‘green shoots’ only appear when the rate of interest is allowed to fall to at or below the rate of inflation.

In reality, compound interest has always been for the few, not the many. It’s an accounting trick that depends on the majority of the beneficiaries of compound interest never realising their apparent gains; never spending their paper bonanzas. Paper wealth can be converted to real wealth by just a few. Paper wealth – financial claims – can be inflated, infinitely, so long as it remains just that; paper wealth or its digital equivalent.

Compound interest with compounding economic growth.

The advocates of compound interest will respond by saying that compound interest depends additionally on economic growth, real economic growth.

In this story, there are two versions: either compound interest parasitically exploits economic growth, or it enables economic growth. Either way, the supposition is infinite exponential growth.

The simplest scenario here is of an economy with zero inflation, zero population growth, two-percent annual interest, and two-percent annual growth of real GDP. So, in this case, the two-percent compound interest simply represents the fruits of that economic growth; the only debtors would be firms, not households. In principle everyone could be doing it; the interest payable to every household would be paid by business growth.

There are two obvious problems. One is that real exponential growth cannot go on forever. If average real incomes today had been growing by two-percent per year since the early days of the Roman Empire, today we would on average have living standards 16 million trillion times greater than those of Jesus Christ and his Disciples.

The illusion (really delusion) of long-term sustained economic growth has been made possible by early-modern humans’ learning to extract energy in the form of fossil fuels, and to dump waste products into the environmental commons. Late-modern humans could have invested – financially and intellectually – in systems to maintain high living standards beyond the fossil fuel age; but haven’t. Our home planet, though forgiving in many respects, is finite.

The other obvious problem is that if too many households are saving rather than spending much of their incomes, then there would be insufficient demand for final goods during the long period of saving. This kind of saving behaviour breeches Say’s Law, which is the basis of the belief-system of classical-liberal supply-side economics – manifest today as neoliberalism. Say’s Law supposes that policymakers do not and should not concern themselves with matters of ‘upside demand’ – aka ‘stimulus’. Nor should they concern themselves with ‘downside demand’ – aka ‘counter-stimulus’ – yet that’s exactly what we got with the openly touted manufactured recession created by the Reserve Bank of New Zealand from 2021. (Refer Adrian Orr admits Reserve Bank is ‘deliberately engineering recession’, Stuff, 24 November 2022.)

The required economic growth would not continue, because there would be insufficient demand for the extra output; demand is created by the creation of and spending of claims, the prerogative of sovereign governments and of banks.

Saving must be balanced by investment; too much saving disincentivises investment spending, sometimes dramatically so. We can see that, the reason for today’s weak investment climate; so we depend on the Deus ex machina (or cargo cult) of exogenous foreign demand. Exports featured prominently as the principal narrative of You, Me and the Economy.

The other mantra word is ‘productivity’. Most cafes do not need more cost-saving devices to improve their productivity; rather, to improve their productivity, cafés need more customers.

See Our inability to understand the exponential function is our biggest weakness, YouTube, posted by Professor Albert Bartlett about a month ago. All exponential growth, in nature, ends; sometimes catastrophically.

Finally

Why don’t the people we believe to be experts tell us these things? Could it be that the experts we most see and hear are experts in the arts of storytelling and story-marketing; in this case, experts in the fantasy rather than in the reality of growth? (Refer Greta Thunberg’s radical climate change fairy tale is exactly the story we need, The Conversation, 28 September 2019.)

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

I just heard on Radio New Zealand a claim by a British commentator, Hugo Gye (Political Editor of The i Paper), that the United Kingdom (among other countries) has a major public debt crisis, and that if nothing is done about it (such as what Rachel Reeves – Chancellor of the Exchequer – is wanting to do), then in 2070 the public debt to GDP ratio would reach an ‘extreme’ level of 270% of GDP (gross domestic product). He added for good measure that no country in the world has public debt at a level anything like that. (Refer UK: Macron meets the King, RNZ, 10 July 2025.)

So I checked the International Monetary Fund, World Economic Outlook Database, April 2025, and found the following about Japan, the world’s fourth-largest national economy, looking at years from 2010 to 2024, with respect to government gross debt and general government financial deficit:

• minimum debt 206% (in 2010)
• maximum debt 258% (in 2020)
• average debt 234%
• current debt 237% (in 2024)
• projected debt 232% (in 2030)
• minimum deficit 2.3% (in 2023)
• maximum deficit 9.1% (in 2010)
• average deficit 5.3%
• current deficit 2.5% (in 2024)
• projected deficit 5.3% (in 2030)

Japan does not have a ‘cost of living crisis’. Below is a list of Japan’s interest (source: tradingeconomics.com) and inflation rates (again the reference period is 2010 to 2024):

• minimum interest -0.1% (in 2016-2024)
• maximum interest 0.25% (in 2024)
• average interest 0.0%
• current interest 0.5% (in 2025)
• minimum inflation -0.7% (in 2010)
• maximum inflation 3.3% (in 2023)
• average inflation 0.9%
• current inflation 2.4% (in 2025)
• projected inflation 2.0% (in 2030)

Japan is a prosperous country, with high life expectancy (85, the highest in the world for large economy nations), a very high ratio of retired people to working-age people, low inflation, and low interest rates. It was able to host the Olympic Games in 2021 without any financial fuss, and is about to host World Expo 2025. It has some of the world’s most sophisticated infrastructure.

Despite its high government debt – actually, to a large extent because of its high government debt – Japan’s is a creditor economy. Japan is not in debt to the rest of the world. Japan’s national debt is non-existent. Japan’s government debt is widely acknowledged, however, to be the world’s highest. Too many commentators – using wilful laziness – conflate national debt with government debt.

Japan’s is the world’s most successful twenty-first century large economy. It operates by Japanese savers lending much of their savings to their government at very low interest rates; those savers prefer to lend to their government rather than to pay high taxes to their government. Prosperous Japanese people are not greedy in the way that many rich westerners are. Their mantra is ‘private wealth, public wealth’; not ‘private wealth, public poverty’. Japan’s is not a zero-sum economy; in a zero-sum economy the prosperity of some comes at the expense of the impoverishment of others.

Hugo Jye was negligent – a case of wilful blindness or ignorance – in claiming that no countries had anything like 270% of GDP government debt. Western economists and financial commentators are wilfully negligent in failing to alert their countries’ governments that there is an alternative – in plain sight – to our woeful policies of financial suffocation.

Note about three other economies

Within the European Union, it is rare for professional commentators to sing the praises of Spain and Italy. Spain, with 101% public debt, is enjoying a low inflation economic boom. It has a life expectancy of 83, higher than all European Union countries other than Malta and Luxembourg. Spain has had only government budget deficits since the surpluses of the years leading up to the 2008 Global Financial Crisis (a crisis which hit Spain particularly badly). Despite – no, because of – these accumulated deficits, Spain’s public debt (as a percent of GDP) has been falling since 2020; the deficits stimulated GDP. Spain had one year of high inflation (8.3% in 2022; the next highest since 2020 were 3.05% in 2011 and 3.0% in 2021); it recovered very quickly from that one year. Spain’s current interest rate is 2.15%.

Italy had 135% government debt to GDP in 2024. Its people’s life expectancy is high, marginally lower than Spain’s and slightly higher than New Zealand’s; significantly higher than Germany, Netherlands and the United States. Italy’s economy has been growing faster than the European Union average. Its public debt (compared to GDP) has been falling despite government deficits.

Spain and Italy are doing relatively well despite having among the highest older-person to younger-person age ratios in Europe. Spain is pro-actively utilising immigrant labour, whereas Northern Europe is scapegoating immigrants. And Spain, unlike most of Europe, is not looking to its ‘Defence’ budget to boost future growth.

Türkiye’s public debt has fallen from a high (since 2006) of 40% in 2021 to under 30% in 2023. This is despite double-digit inflation since 2016 and an average budget deficit since 2011 of 5.3%. While high inflation has benefitted Türkiye by bringing about negative real interest rates (meaning interest payments effectively flow from richer to poorer, generally benefitting indebted Turkish businesses and households), current interest rate settings look like suffocating for Türkiye for the remainder of the 2020s. (This monetary policy of suffocation is also true for Australia in 2025, with its particularly hawkish Reserve Bank at present.)

Despite challenging geopolitical and climatic circumstances, Türkiye has, at least until 2024, managed to achieve rising living standards for a substantial majority of its people. Unlike the United Kingdom and some northern European countries, Türkiye has not been a crisis economy despite (or because of) a reputation for unsound public finance.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Government-owned Kiwirail is supposed to be presiding over the New Zealand Main Trunk (Railway) Line, from Auckland to Invercargill. As such it runs a ferry service (The Interislander) between New Zealand’s North and South Islands.

We are being told by Kiwirail (and see today’s report on Radio NZ) that the only rail-enabled roll-on roll-off ferry – the Aratere – will cease operations in August this year, five years before its putative successor ferries will commence operations.

At the same time, rail is being revitalised in the South Island, with the Hillside workshops redevelopment. (And see the following on Scoop last Friday: New Hillside Workshops Officially Opened and Rail Workers Celebrate Hillside Workshops Rebirth.) How can this be: simultaneous expansion and contraction of New Zealand’s trunk railway under the governance of the same government?

There is a simple conceptual solution, which covers both the short run and the long-run.

Kiwirail could relocate the Interislander’s South Island terminus to Lyttelton, the rail-accessible port of Christchurch. Indeed this should have become policy after the dramatic 2016 Kaikoura earthquake which destroyed both railway and highway around Kaikoura, halfway between Wellington and Christchurch; both road and rail main trunk. Not only is the present route precarious, but also it is so much ‘greener’ for both road and rail traffic between the North Island and the southern 85% of the South Island (by population) to travel by sea between Wellington and Christchurch. That is, the bulk of interisland vehicle travel undertaken directly by sea is more sustainable than a journey by sea between Wellington and Picton followed by a long 340km Picton to Christchurch land journey.

The suggested solution is that The Interislander should operate out of Lyttelton from about 2030, leaving Bluebridge to service the Wellington Picton route. If that were to happen, then the Aratere could stay in service until 2030; because the new facilities suited to the new ships – at least the South Island facilities – would not have to be on the same site as Picton’s present rail-ship facilities.

Last year I wrote to MPs from all five parties, before it was too late to cancel the shipping order for the cancelled iRex project, including the Labour MP for Lyttelton. Only the Green Party bothered to reply to me. And even they were unenthusiastic about the idea of the Interislander shifting to Lyttelton; their lack of interest came across as more a matter of political priority than as an argument about economics or sustainability.

Maybe I am stupid, and I simply cannot see the obvious reasons why a shift back to Lyttelton cannot happen. But I really think we should have a national conversation about the restoration of ferry services between Wellington and Lyttelton; and with the current consciousness about the future of rail being a very important stimulus to that conversation.

After all, for over 100 years, before 1960, Wellington to Lyttelton was the essential ‘main trunk’ link between the two islands. The change-around happened around 1960 because the previous Wellington to Picton service had become so run-down that something had to be done about it. And that there just happened to be a relatively new railhead at Picton. After 1960, the Lyttelton service was doomed to fail when it became a one-ship service in 1968, after the tragic demise of the then state-of-the-art Wahine.

Why don’t we have national conversations anymore? Everything seems to happen as a fait accompli, narratives driven by unimaginative back-office accountants with short time horizons. And mainstream academics and media simply accept this under-democratic state of affairs.

We are still suffering from the infrastructure backlog that escalated in the early 1990s when Finance Minister Ruth Richardson forced many of New Zealand’s unemployed and underemployed to emigrate, especially to Australia; all in the name of ‘fiscal responsibility’. Some of those people who left for Australia just as its banking crisis was unfolding – especially their children – are drifting back to New Zealand in the 2010s and 2020s as ‘501’ deportees (see Product of Australia, Stuff December 2019, and noting in a chart that more than half of the 501s deported to New Zealand from 2015 to 2019 were aged 26 to 40).

Those young (mainly) men could have been building New Zealand; instead, too many became criminals in Australia. And the New Zealand economy regressed for the best part of ten years (from 1985), while the rest of the world was progressing. That period is the source of the now-entrenched Australia New Zealand differential in living standards.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Recessions in the last Ten Years: New Zealand and Japan

Tomorrow we will see the latest Gross Domestic Product (GDP) data for New Zealand. It’s worth looking today, however, at what the situation is before that data release (with its revisions as well as new data). And in context by comparing New Zealand with a country with different demographic circumstances.

First, the journalistic definition of a recession is two consecutive quarters of negative GDP growth; this is normally taken to be overall GDP, not GDP per person in the growing or declining population.

An alternative definition is to compare GDP in the latest quarter with GDP in the same quarter of the previous year. By this Y-to-Y definition, any negative number is a recession. However, for New Zealand, the highest quarter for GDP in today’s available data is the September 2022 number (1.325 billion dollars; not shown in table). Therefore, each quarter of 2023 has a lower GDP number than September 2022. Thus, by this definition, all of 2023 should be classed as in recession.

The table below highlights recessions in New Zealand and Japan by both definitions, and then adds per capita recessions. (Per capita – ie population adjusted – recessions are highlighted in yellow.)

Under the commonly used criterion, New Zealand was in a technical recession in the first quarter of 2023, and in the June quarter of 2020. The 2020 recession is clearly related to the Covid19 disruptions. (And Japan was in recession only at the end of 2018.) When allowing for population changes, New Zealand under this measure has been in a recession for all of 2023.

When applying the alternative measure of recession, we see again that New Zealand has been in recession for all of 2023 for which we have data today. Japan turns out to have been in a long recession during 2019 and 2020.

What is also important to note is that, despite overall slower growth in the last ten years, Japan has shown itself to have had a much more vigorous economy than New Zealand in 2023.

I will follow this up tomorrow with some explanations for the superior performance of Japan after 2020.

But I will end this by considering the imaginary country of Neustria.

In Neustria, the general pattern was falling GDP from 2013 to 2018. And the general pattern from 2019 to 2023 was rising GDP.

The alternative definition of recession shows this correctly; Neustria was in recession from 2013 to 2018. But the popular measure our media and some academics use shows recessions only (and persistently) in the growth period from 2019 to 2023.

This last table shows the substantial shortcomings of our popular definition of recession. It suggests that the alternative measure suggested is superior to the popular measure. This reaffirms the reality that the New Zealand economy has been in recession through most if not all of 2023. And that’s the reality New Zealand businesses were facing last year, and are still facing this year.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Analysis by Keith Rankin.

The new government is making a weak start to its tenure. On Morning Report (RNZ, 28 Nov 2023, Prime Minister Luxon to lead first cabinet meeting), Mr Luxon repeated a comment such as he has made several times before: “The number one job is to rebuild the economy so we can lower the cost of living so everyone can get ahead“. Three clichés in one short sentence!

First cliché. Is the economy destroyed, and therefore in need of rebuilding? Or is Mr Luxon planning to destroy the economy, so that it can be rebuilt? Or is he just speaking inane hyperbole?

Second cliché. Is Mr Luxon calling for deflation? Is he promising to lower the CPI (consumers price index)? That’s a literal interpretation of what he said.

Or did he mean to say: ‘lower the rate of inflation’? That is, did he mean to say that his aim is to slowdown the rate at which the cost of living is increasing? (We’ll ignore for now the fact that ‘inflation’ and ‘an increasing cost of living’ are technically and practically different things, although they are related through the concept of ‘rising prices’.)

For most of the 2010s, the Reserve Bank of New Zealand was waging a quixotic war against price deflation, on the basis that deflation is worse than inflation. Mr Luxon now seems to be saying that deflation is a desirable thing. Yet, as I understand it, the changes which he wants to make to the Policy Targets Agreement (the Government’s contract with the Reserve Bank) are to create a single mandate that makes inflation compulsory.

Third cliché. Can everyone get ahead? Ahead of who or what? The natural understanding of this aspiratorial cliché is the metaphor of a running race. In one sense everybody gets ahead if they all reach the finish line, because they will be ahead of the start line. But in another sense ‘getting ahead’ means ‘winning’ or at least ‘not losing’; in this sense its logically impossible for everyone to get ahead.

As I understand it, ‘getting ahead’ is an awkward cliché for ‘equality of opportunity’. ‘Equality of opportunity’ is a mantra for centrist liberalism which I suspect that the outgoing Chris and the incoming Christopher both subscribe to. The metaphor is that life is a running race (the human race?) and the starting point is at the ‘age of majority’; say, 18. The ideal is that every adult starts as equals. (The two variations are the Act liberal race, which is like Formula One motor racing, where the most likely winners have favourable starting positions; whereas the Labour liberal race is more like the Melbourne Cup, where the more-likely winners are subject to a handicap.)

This concept of centrist liberalism explains why we are so obsessed with ‘child poverty’ and so little concerned with adverse outcomes in adult life. As the story goes, adults are ‘free to choose’ and must ‘lie in the beds’ that we (as adults) make for ourselves. In this narrative, children are not free to choose; social policy is therefore all about ensuring an equitable (or acceptable) starting line for the race of life.

The idea that everyone gets ahead seems very socialist to me. Under liberalism, some people do get behind. Necessarily.

Why do media interviewers meekly accept these clichés?

Two Other Clichés

I’ll mention two other common clichés, without much elaboration. These are most often heard by mainstream commentators. Refer to RNZ The Panel part 1, 27 November 2023.

The fourth cliché is that we should have a longer parliamentary term (than three years) because we waste the election year on politicking, and waste the year after elections in getting set-up. It’s an assertion repeated repeatedly; but rarely examined. Nobody mentions that the United States’ parliament (Congress) has a two-year term. And few mention the fact that most United Kingdom parliaments do not go full term.

The fifth cliché is that ‘there is only so much money’ to go around. This glib statement is patently false, yet almost always presumed to be true; money is a social technology, not some magical mined mineral. This cliché, subscribed to by the entire Aotearoan political class in 2023, has jammed New Zealand politics into a tight stalemate; into a nasty zero-sum game that ruined the 2023 election. As a result, the new government, in being required to abandon one oft-lampooned method (taxes on foreign buyers of luxury homes) of funding nominal tax cuts, has been required to find another source of funds. So, shock horror, they are choosing a policy that they claim will increase revenue from tobacco taxes. This may well be a bad health policy, though it’s not that clear. But the state of political discourse is so clichéd that the obvious solution – to budget for a slightly larger fiscal deficit – is ‘off the table’, politically speaking. ‘Unfunded’ (ie deficit) spending is a necessity in capitalism; somebody has to incur deficits (it might as well be the government); and as economies grow, total deficits must also grow.

A related cliché, which is less obviously untrue, is that ‘borrowed money has to be paid back’. In fact, borrowed money must be serviced. In public finance, the near-universal truth is that borrowed money is serviced, both through interest payments and rollovers of principal. (Otherwise, money is paid forward, not paid back; eg when I pay down a bank loan, the bank advances that money to someone else. Money literally paid back is money destroyed.) This version of the cliché is like believing that God requires the universe to be ‘paid back’.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Most of the 2.1 billion strong workforce in Asia and the Pacific are denied access to decent jobs, health care and social protection but there is an array polices and tools that governments can use to remedy these deficiencies and ensure that the rights and aspirations of these workers and their families are upheld and that they remain the engine of economic growth for the region. 

A new report released today, the Social Outlook for Asia and the Pacific: The Workforce We Need, offers tangible solutions to immediately address alarming trends that both preceded the new coronavirus and were exacerbated by the pandemic. 

While 243 million new people were pushed into poverty during the COVID-19 pandemic, half of all people in our region already had been surviving without cash, a third without necessary medicine or treatment and a quarter had gone without enough food to eat. This can lower productivity, which has fallen below the global average, but also tax revenues and future economic output. 

With two-thirds of all workers in the region being employed informally, often with low wages, in hazardous working conditions and without a contract, half of our workforce are at the brink of poverty. People in our region are also at a higher risk of being pushed into poverty by health spending than anywhere else in the world, causing inequalities to further widen. With more than half of all people being excluded from social protection, pandemics, disasters economic downturns, or normal life events, such as falling ill, becoming pregnant or getting old often have detrimental impacts on households’ wellbeing and life prospects.

The reality is harsh: our workers are generally ill-equipped to unlock new opportunities, fulfill life aspirations for themselves and their families but also to face ongoing challenges emanating from megatrends of climate change, ageing societies and digitalization. 

Climate-induced natural disasters cause businesses to relocate and jobs to disappear, disproportionately affecting rural communities. Digital technologies are bringing disruptive change to the world of work and the digital gap is intensifying inequalities in opportunities, income and wealth. Population ageing means that the number of older people will double by 2050, making policies to support active and healthy ageing ever more urgent.

None of these vulnerabilities are inevitable. With the right policies, our region’s workforce can become more productive, healthier and protected. 

First, active labour market policies, through life-long learning and skill development, can support a green and just transition into decent employment and improve access to basic opportunities and adequate standards of living. Harnessing synergies between active labor market policies and social protection can help workers upgrade their skills and transition into decent employment while smoothing consumption and avoiding negative coping strategies during spells of unemployment or other shocks.

Second, extending social health protection to all can significantly improve workers’ health, income security and productivity. COVID-19 demonstrated the weakness of a status quo in which 60 per cent of our workers finance their own health care and receive no sickness benefits. A focus on primary health care as well as curative health protection is needed, also to support healthy and active ageing. People who are chronically ill or live with a disability must be included in health care strategies. Given the large informal economy across the region, extending social health protection is the key policy instrument for achieving universal health coverage in our region.

Third, building on the ESCAP Social Protection Simulator, a basic package of universal child, old age and disability social protection schemes, set at global average benefit levels, would slash poverty in our region by half. Our analysis also shows that social protection helps increase access to opportunities particularly for furthest behind groups. This income security would improve the workforce’s resilience. Extending social protection to all means increasing public spending by between 2 and 6 per cent of GDP, an investment well-worth its cost. The Action Plan to Strengthen Regional Cooperation on Social Protection in Asia and the Pacific can guide action towards broadening social protection coverage. 

With this information at hand, there is a long overdue need for action. The policy recommendations set out in the Social Outlook are a priority for most countries in the region. These require bold but necessary reforms. For most countries these reforms are affordable but may require a reprioritization of existing expenditures and tax, supported by tax reform. Decent employment for all and an expansion of social protection and health care should form the foundations of a strong social contract between the State and its citizens. One where mutual roles and responsibilities are clear and where our workforce is given the security to fulfil their potential and be the force for achieving the 2030 Agenda on Sustainable Development in Asia and the Pacific.

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Armida Salsiah Alisjahbana is an Under-Secretary-General of the United Nations and Executive Secretary of the Economic and Social Commission for Asia and the Pacific (ESCAP)

The Asia-Pacific region is at a crossroads today – to further breakdown or breakthrough to a greener, better, safer future. 

Since the Economic and Social Commission for Asia and the Pacific (ESCAP) was established in 1947, the region has made extraordinary progress, emerging as a pacesetter of global economic growth that has lifted millions out of poverty. 

Yet, as ESCAP celebrates its 75^th anniversary this year, we find ourselves facing our biggest shared test on the back of cascading and overlapping impacts from the COVID-19 pandemic, raging conflicts and the climate crisis.  

Few have escaped the effects of the pandemic, with 85 million people pushed back into extreme poverty, millions more losing their jobs or livelihoods, and a generation of children and young people missing precious time for education and training. 

As the pandemic surges and ebbs across countries, the world continues to face the grim implications of failing to keep the temperature increase below 1.5°C – and of continuing to degrade the natural environment. Throughout 2021 and 2022, countries across Asia and the Pacific were again battered by a relentless sequence of natural disasters, with climate change increasing their frequency and intensity. 

More recently, the rapidly evolving crisis in Ukraine will have wide-ranging socioeconomic impacts, with higher prices for fuel and food increasing food insecurity and hunger across the region.

Rapid economic growth in Asia and the Pacific has come at a heavy price, and the convergence of these three crises have exposed the fault lines in a very short time. Unfortunately, those hardest hit are those with the fewest resources to endure the hardship. This disproportionate pressure on the poor and most vulnerable is deepening and widening inequalities in both income and opportunities. 

The situation is critical. Many communities are close to tipping points beyond which it will be impossible to recover. But it is not too late. 

The region is dynamic and adaptable.

In this richer yet riskier world, we need more crisis-prepared policies to protect our most vulnerable populations and shift the Asia-Pacific region back on course to achieve the Sustainable Development Goals as the target year of 2030 comes closer — our analysis shows that we are already 35 years behind and will only attain the Goals in 2065.

To do so, we must protect people and the planet, exploit digital opportunities, trade and invest together, raise financial resources and manage our debt. 

The first task for governments must be to defend the most vulnerable groups – by strengthening health and universal social protection systems. At the same time, governments, civil society and the private sector should be acting to conserve our precious planet and mitigate and adapt to climate change while defending people from the devastation of natural disasters. 

For many measures, governments can exploit technological innovations. Human activities are steadily becoming “digital by default.” To turn the digital divide into a digital dividend, governments should encourage more robust and extensive digital infrastructure and improve access along with the necessary education and training to enhance knowledge-intensive internet use.

Much of the investment for services will rely on sustainable economic growth, fueled by equitable international trade and foreign direct investment (FDI). The region is now the largest source and recipient of global FDI flows, which is especially important in a pandemic recovery environment of fiscal tightness. 

While trade links have evolved into a complex noodle bowl of bilateral and regional agreements, there is ample scope to further lower trade and investment transaction costs through simplified procedures, digitalization and climate-smart strategies. Such changes are proving to be profitable business strategies. For example, full digital facilitation could cut average trade costs by more than 13 per cent. 

Governments can create sufficient fiscal space to allow for greater investment in sustainable development. Additional financial resources can be raised through progressive tax reforms, innovative financing instruments and more effective debt management. Instruments such as green bonds or sustainability bonds, and arranging debt swaps for development, could have the highest impacts on inclusivity and sustainability.

Significant efforts need to be made to anticipate what lies ahead. In everything we do, we must listen to and work with both young and old, fostering intergenerational solidarity. And women must be at the centre of crisis-prepared policy action. 

This week the Commission is expected to agree on a common agenda for sustainable development in Asia and the Pacific, pinning the aspirations of the region on moving forward together by learning from and working with each other. 

In the past seven-and-a-half decades, ESCAP has been a vital source of know-how and support for the governments and peoples of Asia and the Pacific. We remain ready to serve in the implementation of this common agenda. 

To quote United Nations Secretary-General Antonio Guterres, “the choices we make, or fail to make today, will shape our future. We will not have this chance again.”

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Armida Salsiah Alisjahbana is the United Nations Under-Secretary-General and Executive Secretary of the Economic and Social Commission for Asia and the Pacific.

Questions have been raised about why the head of Fiji’s Bureau of Statistics was fired by the Bainimarama government this week.

Kemueli Naiqama recently published this year’s household income and expenditure survey that showed three quarters of Fiji’s poorest people are indigenous Fijians, or i-Taukei.

It is the first time ethnicity has featured in data published in the annual survey.

RNZ’s correspondent in the capital Suva, Lice Movono, told RNZ FirstUp the bureau had been “enhancing their ability to report information” and trying to be in line with sustainable development goals reporting.

“And the latest report shows that the poorest people in this country are the i-Taukei people,” Movono said.

“But more importantly that our poverty population — or the population that is living well below the poverty line — is very high.

“It would be directly opposite to the policies of this government to give information segregated according to ethnicity — it would be extremely embarrassing for a government that has been talking about producing an all time record high boom – economic growth,” she said.

Sacking defended
The Statistics Department comes under the Ministry for Economy.

The Minister, Aiyaz Sayed-Khaiyum who is also Fiji’s Attorney-General, has defended his sacking of the country’s chief statistician.

Sayed-Khaiyum questioned the methodology used for the study and labelled it flawed.

“Poverty in Fiji is now measured by consumption, including the food grown in a family backyard, and not just income,” he said.

Sayed-Khaiyum told a media conference in Suva he had issues with the bureau’s analysis of ethnic and religious data in its 2019-2020 Household Income and Expenditure Survey (HIES).

“We appreciate any independent office carrying out a proper, professional independent analysis of any data and understand the importance of reliable, timely and accurate statistics,” Sayed-Khaiyum said.

“And many may not know this or many may not delve further into this — we in fact approved this new methodology of moving away from what we call using the traditional income measure for welfare analysis — to using consumption expenditure for poverty measurement.”

New measuring yardstick
Sayed-Khaiyum said the consumption-based methodology for measuring poverty would “accurately and better assist in policy-making”.

He said the new yardstick did not just look at how much money a household earned but also at how they had access to services.

But there were many who disagreed with the attorney-general.

The University of the South Pacific’s senior lecturer in economics, Dr Neelesh Gounder, said the poverty estimates produced at all levels were reliable.

He said those not happy with the ethnic-based policy needed to target the policy and not the data.

Gounder said the survey was just the “messenger and shooting the messenger would not help.”

“Regarding data on ethnicity, there are several policy areas where ethnic-based data is relevant and required,” Dr Gounder said.

Ethnic data important
“Ethnic data allows us to see beyond presumed beliefs and prejudices that underly ethnic groups and it seems the government wants to avoid race-based policies that may arise from ethnic data.

“Recognising diversity based on ethnicity does not necessarily mean such differences should also lead to policy based on ethnicity.”

However, the government needs to understand that it is not the census or HIES that is causing ethnic tension in Fiji, Dr Gounder said.

The leader of the opposition Social Democratic Liberal Party (SODELPA), Bill Gavoka, said reports Naiqama was escorted out of his office were “shameful”.

“It is truly troubling,” Gavoka said.

He said the Bureau of Statistics is independent of ministers and instead reported directly to Parliament, with staff who are civil servants, but without being under ministerial control.

“The statistics they generate are independent of government and to hear that the FBoS CEO Kemueli Naiqama was unceremoniously dismissed and escorted off-premises for the report of poverty in Fiji, says a lot about the type of democracy we have in Fiji,” Gavoka said.

Independence needed
He said SODELPA wants the Statistics Bureau to have independence from any undue outside influence, especially from a government that has been hyping about a “boom” that many knew was not true.

“The collection, compilation, analysis, abstraction, and publishing of statistical information relating to the economic and general activities must be carried out without fear and SODELPA tells the Attorney-General and FijiFirst, ‘hands off’,” Gavoka said.

By exceeding the scope of data collection and ignoring fact-based methodology, the government said Naiqama had breached the terms of his contract with the ministry.

Under his employment contract, Naiqama will be paid all salary and accrued entitlements for the period up to September 15, 2021.

This article is republished under a community partnership agreement with RNZ.

Article by AsiaPacificReport.nz

Tomorrow (February 19) marks the entry into force of a new international agreement promoting paperless trade, a timely reminder of how the COVID-19 pandemic has brought digital solutions to regional development challenges into the limelight.

Paperless trade across borders has proven an effective way to mitigate trade disruptions since the onset of the crisis, enabling commerce to continue while limiting physical contact. Yet, despite the increasing acceptance of electronic documents across borders, implementation of cross-border paperless trade remains low according to the United Nations Global Survey on Digital and Sustainable Trade Facilitation for Asia and the Pacific.

Across Asia and the Pacific, governments must move from time-consuming paper-based processes to electronic and traceable trade procedures that can significantly enhance competitiveness and address new challenges associated with e-commerce and the digital economy. In doing so, our region can also recover some of the $200 billion in illicit financial flows that sharply reduce the capacity of governments to put in place support measures for vulnerable groups.

At the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), in 2016, member States adopted the Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific to accelerate trade digitalization – the electronic exchange of trade-related data across borders – while leaving no one behind.

More than 25 countries worked together to develop the treaty, which is now open for accession to all 53 members of ESCAP. The five countries that have ratified or acceded to the treaty — Azerbaijan, Bangladesh, China, the Islamic Republic of Iran and the Philippines – represent a diverse group of countries spanning the wider Asia-Pacific region but all are committed to regional cooperation in this critical area. Armenia and Cambodia signed the treaty in 2017 while several other ESCAP members are in the process of completing their accession this year, before implementation of the agreement starts in earnest in 2022.

But we must do more to realize the transformative potential of trade digitalization.

First, we need to fully use the Framework Agreement to  provide a region-wide multilateral intergovernmental platform, a dedicated space for developing and testing legal and technical cross-border paperless trade solutions that build on national, bilateral, and subregional initiatives. This treaty marks the beginning of a new journey, one focused on turning cross-border paperless trade into reality through cooperation, testing, innovation, and implementation.

Second, we have to ensure that the Framework Agreement is catalyst for  those countries that become a party to it to implement key measures featured in the Trade Facilitation Agreement (TFA) of the World Trade Organization (WTO), including Single Windows and other actions requiring the use of information and communication technologies.

Third, we recognize that the Framework Agreement is an inclusive and highly flexible cooperation and capacity building opportunities that countries can participate in regardless of their levels of development and digitalization. The estimates presented in the most recent regional trade facilitation report by the Asian Development Bank (ADB) and ESCAP suggest that the Framework Agreement can help reduce trade costs by more than 20 per cent in most of the region’s developing countries. So, this is particularly important now when many bilateral or regional deals exclude some of the least developed countries.

I encourage all ESCAP member States to join the treaty as soon as possible and demonstrate political will. There is no deadline for acceding to the treaty but doing so early on will ensure a seat at the table when the Parties formally discuss the implementation of priorities. The benefits of cross-border paperless trade multiply with the number of countries involved. So, the more countries on board, the larger the development gains for all. It is time to accelerate the excellent bilateral and subregional paperless trade initiatives that have emerged across the Asia-Pacific region to build truly seamless and resilient supply chains as we recover better together in the post-COVID-19 era.

Armida Salsiah Alisjahbana is Under-Secretary-General of the United Nations and Executive Secretary of ESCAP

When New Zealand Health Minister Chris Hipkins recently quipped that the Green Party is “to some extent the conscience of the Labour Party” he was not simply referring to polls suggesting Labour may need the Greens’ support to form a government.

Hipkins was also suggesting Green policies help keep Labour honest on environmental and social issues. So, what difference has the Green Party really made to New Zealand’s political debate?

Drawing on a study of 57 million words spoken in Parliament between 2003 and 2016, our analysis shows the presence of a Green party has changed the political conversation on economics and environment.

In the recent Newshub leaders’ debate, both Jacinda Ardern and Judith Collins agreed that “growing the economy” was the best way to respond to the economic crisis driven by covid-19.

Their responses varied only on traditional left-right lines. Ardern argued that raising incomes and investing in training would grow the economy. Collins suggested economic growth should be advanced by increasing consumer spending through temporary tax cuts.

By contrast, Green parties in New Zealand and elsewhere have long questioned the impact of relentless growth on the natural resources of a finite planet.

Green thinking is informed by ecological economics, which aims to achieve more sustainable forms of collective prosperity that meet social needs within the planet’s limits.

The language of economic growth
The impact of this radically different view can be observed in New Zealand parliamentary debates. When MPs from National and Labour used the word “economy” they commonly talked about it in the context of “growth” (“grow”/“growing”/“growth”).

On average, National MPs said “growth” once every four mentions of “economy”. Labour MPs said “growth” once every six mentions.

Green MPs used “growth” once every 20 mentions of “economy”. When they did mention growth it was primarily to question the idea and to present alternative ideas about a sustainable economy.

Our analysis of the most recent parliamentary term (2017-2020) is ongoing.
However, while Labour has recently introduced “well-being” into discussions of the economy, it is striking how the covid crisis has reinvigorated the party’s traditional focus on growth economics.

The research also shows Green MPs mention “economy” primarily in relation to the environment, climate change, sustainability and people, rather than in relation to growth. Their distinct focus is on the connections between the economic system and the environment.

From Labour to the Greens
Despite criticism that the Greens have not focused enough on “environmental” concerns, Green MPs used words related to environment, climate and conservation more frequently than Labour or National MPs over the 13-year study period.

For example, after controlling for the number of words spoken by each party’s MPs in parliament, Green MPs mentioned “climate change” four times more than National or Labour MPs.

This represents something of an historical shift. Atmospheric warming and CO₂ were first talked about in parliament by Labour MP Fraser Coleman in 1979. And Labour’s Geoffrey Palmer was the first prime minister to place climate change on parliament’s agenda.

But it has been the Greens who have maintained the momentum, using their speaking opportunities in the House to hold governments to account, including progressing legislation on the Climate Change Response (Zero Carbon) Amendment Act 2019.

Making women’s voices heard
The Green Party has also made a difference to who speaks. By institutionalising gender balance in their leadership and party organisation, and in the way they select their party list for each election, the Greens have consistently elected a higher proportion of female MPs than the other parties.

Historically, female Green MPs have contributed significantly to debates and policy action on inequality, child poverty, Treaty of Waitangi issues, gender equality and action on domestic violence.

This is significant. Analysis of political language globally, particularly on social media, has shown that politicians who identify as women and people of colour are subject to far higher rates of verbal abuse than their male counterparts. This is also the experience of female MPs in New Zealand, including women representing the Greens.

‘Quantity of life or quality of life?’ A 1972 election ad from the Values Party, political ancestor of the Greens.

A history of disruption
Minority parties often struggle to maintain their identity in coalition arrangements with larger parties, but the Greens have retained a unique position in New Zealand.

In 1972, the Values Party became the first “green” party to contest a national election anywhere in the world. Former Values activists, including the first Green Party co-leaders Jeanette Fitzsimons and Rod Donald, were later successful in taking the Greens into Parliament.

The language of green politics in New Zealand and the questioning of growth can be traced back to these origins. Language and words are significant as vehicles for articulating new ideas and provoking transformative action.

Linguistic analysis therefore shows how influential the Green Party has been in presenting alternatives to the idea that economic growth based on unlimited use of New Zealand’s natural resources is a sustainable option.

If Chris Hipkins is correct and the Greens are Labour’s conscience, it is because
they have effectively disrupted a historical near-consensus among the major parties that economic growth is the only driver of prosperity.

Dr Geoffrey Ford is lecturer in digital humanities and a postdoctoral fellow in political science and international relations, University of Canterbury; Dr Bronwyn Hayward, is professor of politics, University of Canterbury, and Dr Kevin Watson, is dean of arts and associate professor of linguistics, University of Canterbury. This article is republished from The Conversation under a Creative Commons licence. Read the original article.

Article by AsiaPacificReport.nz

Definition

‘Balance sheet recession’ is an innocuous name for a very big economic event. It represents a particular kind of contraction of a country’s economy – or of the global economy – in which one of the most important laws of ‘financial economics’ is practically disabled; that is the economic law that households and businesses respond to interest rates. In addition, it is a period in which banks impose unusually tight lending criteria with respect to unsecured household and business borrowers.

Households and businesses can be understood as the parties – or participants – of ‘the Economy’; that is, households and businesses are economic parties. There is one other key party – governments – which also plays an important role in the economy. So, the global economy can be thought of as a ‘game’ involving three parties. It is a ‘game’ that – if played well – has no losers; ‘the Economy’ should be understood as a win-win game. Introductory versions of the economic game are two party versions; households are the first party and businesses are the second party.

(We may note that, when considering single nations, the economic game is usually considered to have four parties – foreign households, businesses and governments are commonly lumped together as the fourth party. Generally, all households, taken together, make up the household sector; and voluntary organisations such as clubs can be regarded as households. Businesses taken together constitute the business sector, and all parties foreign constitute the foreign sector. The government sector includes governments at all levels; local, provincial, national. The economic ‘game’, in its purest form, is global; it has no foreign sector, people are people wherever they live.)

Some more definitions. Finance and economics are different – though related – disciplines. ‘Financial economics’ is the part of the discipline of economics which relates to borrowing and saving by the participating parties; so, it relates to the financial deficits and surpluses of households, businesses and governments. Economics is about ‘the Economy’. Financial economics enables us to understand how the distribution of spending can be different from the distribution of income.

Finance – as a distinct discipline – is about the behaviour of financial markets. Thus, it’s about the buying and selling of ‘assets’. Finance is about, as I have called it elsewhere, ‘the Casino’; my preferred term for ‘secondary financial markets’. There are secondary financial markets in shares (equities), bonds (promises, including government bonds), land (real estate), commodities (eg gold and silver), financial derivatives, cryptocurrencies such as ‘bitcoin’, and certain scarce items such as artworks.

We can understand that money circulates in both ‘the Economy’ (the subject of ‘economics’) and ‘the Casino’ (the subject of ‘finance’). Banks are the creators of money – and are thus central to both ‘finance’ and ‘financial economics’.

Under normal circumstances – including normal recessions – with decreasing interest rates, households and businesses respond by borrowing more and saving less; that is, they borrow more from banks and deposit less to banks. And the converse holds; with increasing interest rates, households and businesses respond by borrowing less and saving more. For reasons that are not clear, there is a convention that governments are insensitive to interest rates, under all circumstances. This convention has been sorely tested since the global financial crisis of 2008, but still appears to hold.

(Government-related financial economics is called ‘fiscal policy’; economists can distinguish between ‘autonomous fiscal policy’ and ‘induced fiscal policy’. ‘Induced fiscal policy’ represents government responses to the ‘monetary policy’ actions of the Reserve Bank. The unwritten and unnecessary convention is that all fiscal policy is ‘autonomous’.)

During a balance sheet recession, this normal link between banks and the Economy becomes disabled. Lending to households and business does not increase – as it should – when interest rates decrease. The result is that banks engage less with the Economy, and more with the Casino. The other possibility is that, rather than engaging more with the Casino, banks engage more with governments. This depends critically on governments willingness to pursue an ‘induced fiscal policy’. (There is one other possibility, that the banks practically disengage from both the Economy and the Casino. In the Great Depression – in a number of countries, especially the United States – that meant huge numbers of bank failures through the early stages of that calamity.)

A balance sheet recession happens when a preponderance of otherwise viable businesses (and, commonly, households too) find themselves with so much debt on their books that they become technically insolvent. This situation obliges businesses and households to prioritise the repayment of debt over ongoing investment. These parties become sufficiently debt averse – to both old and new debt – that even very low interest rates cannot persuade them to behave otherwise. Further, banks become reluctant to lend to these businesses and households at usual interest rate margins. It means that money ceases to flow through the Economy via these usual business and household channels. The economy grinds to a halt.

Understanding the Great Depression as a Balance Sheet Recession, and Governments’ Responses

The Great Depression of the 1930s remains “a riddle wrapped in a mystery inside an enigma” to plagiarise Winston Churchill’s description of Russia. While almost everybody has heard of the Great Depression, almost nobody knows what actually happened, what its causes were, or how the world recovered from it. This is not only the case with the general public; it’s also true of academic economists and historians. Economists who know quite a lot about what happened will tend to explain it in terms of the philosophical assumptions they bring to their profession. And many academics – especially American academics – tend to focus on its national dimension, rather than seeing it as a truly global event.

Nevertheless, almost all accounts of the Depression note that mistaken fiscal policies – especially reluctances around government spending – converted what might have been a once in a decade economic event into the economic event of the twentieth century.

Government borrowing was technically more difficult in the early 20th century than it is today; it was a world in which central banking was new. Before the establishment of the Reserve Bank of New Zealand, the New Zealand government had to borrow from the London money market. While the government still borrowed from London and other financial centres in later years, especially at times when exports were insufficient to pay for imports, the presence of the Reserve Bank fundamentally improved the government’s financial autonomy.

The term ‘balance sheet recession’ was only invented in the twentyfirst century – it was not a concept that was understood in the 1930s. Not that it is well understood today. New thinking takes time.

There were other important differences between the Great Depression and the post-1980s economic contractions. The Depression was characterised by quite severe deflation – falling prices – which meant that interest rates close to zero nevertheless represented expensive borrowing. The contrast with more recent events is that borrowing has become very cheap.

The first big new idea that came out of the Great Depression was the ‘debt-deflation’ death spiral. Falling prices would inflate existing debts, and all attempts to pay back money would reinforce the forces that were causing deflation, further inflating existing debts. Thus, the policy imperative in the 1930s was to reverse deflation; to raise prices, to ‘reflate’ the economy. The main policy lever to do this was monetary policy, based on the widespread belief that there was an intimate and predicable relationship between the money supply and the level of prices. It didn’t work. While new monetary reserves can only enter the economy through borrowing, households and businesses were debt-averse; it didn’t matter what the interest rate was.

A secondary monetary policy lever – only able to be applied at the national level – was currency devaluation. The policy did work, though it aggravated problems for countries which didn’t devalue their currencies; it was regarded as a ‘beggar thy neighbour’ policy. New Zealand strongly benefited from two devaluations of the pound – that of the British pound against the American dollar in 1931, and that in 1933 of the New Zealand pound against the British pound.

The policy that did work in all countries – when it was eventually applied – was new government borrowing and spending. The creation of new money had been a necessary but not sufficient pre-condition for economic recovery. The sufficient condition was the mass spending by government of that new money.

There were three major reasons why this required policy was too little and too late, for the world as a whole. First was the gold standard system of fixed exchange rates that applied in the world of the late 1920s and early 1930s; governments of countries that were losing gold were expected to enact pro-depression policies in order to force price deflation. France and the United States in particular behaved as gold hoarders, holding more money at the expense of other countries, and wanting to save rather than spend their gold reserves. A second reason was that price deflation made government borrowing potentially very expensive; just as inflation eroded personal and government debts in the 1970s and 1980s, deflation in the 1930s would aggravate debt.

A third reason was the lack of economic knowledge. The discipline of economics did not have its intellectual revolution until 1936. It was John Maynard Keynes who showed the importance of activist government borrowing during an economic contraction, and allowing debt repayment to take place of its own accord, allowing the recovery to generate the required tax revenue. Applying such counter-cyclical fiscal policy, Budget surpluses in post-recession high growth economies would constrain inflationary pressures that might arise.

Keynes’ findings did not come as a sudden surprise in 1936. There had been plenty of chatter on the subject before that year; indeed Keynes himself wrote much – his collected writings are a massive tome. And Keynes already had a reputation, with several books already well known. People noticed what he wrote. As his thinking developed after 1931, his insights were well available to governments looking for fresh thinking about the unfolding economic crisis.

New Zealand did better than most to get out of the Depression, after a slow – indeed obstinate – start. Once the problematic Minister of Finance (William Downie Stewart Jr.) resigned in opposition to the 1933 devaluation proposal, three important policy decisions happened in the years 1933 to 1937 to bring New Zealand out of the Depression. First was the devaluation of 1933, argued for by new Finance Minister Gordon Coates. The devaluation gave a big boost to the tradable sector; that’s farmers and manufacturers. Second was the creation of the Reserve Bank in 1934 – enabling New Zealand to have sovereign control over its own money supply, especially once it became wholly government-owned in 1936. Third was the willingness of the First Labour Government to use Reserve Bank money to embark on a widespread and successful program of social housing development.

The central problem of the great depression was not just to create new money; the problem was to get that money into circulation into the Economy. That is the problem of the ‘balance sheet recession’, getting money into circulation. Instead, governments trying to balance their budgets by slashing their spending – that is, refusing to borrow to spend – proved to be the principal obstacle to recovery.

Despite the difficulties governments faced, this decision by governments at all levels to retrench – to try to balance their books at a time when households and businesses also were trying to run big surpluses –was the critical factor in making the Great Depression the disaster that it became. In that sense, then, the Depression can be characterised as ‘optional’, given that governments did have another option.

Japan’s 1990s’ Balance Sheet Recession

Japanese are financially conservative people, with a long history of saving and debt averseness. Japanese households were used to lending money to both foreign borrowers and to their own governments.

Japan changed in the late 1980s, following a major global currency realignment (the Plaza Accord) which saw a previously undervalued Yen soar to become substantially overvalued. While this created competitive adversity to Japan’s world-leading manufacturing sector, it also created new opportunities for consumers, and for the development in Japan of ‘the Casino’. A sharemarket bubble began in about 1986, and continued unabated after many other countries’ sharemarkets crashed in 1987. Indeed the 1987 crash created new momentum in Japan, as foreigners sold out of their markets and bought into Japanese financial markets. At the height of the urban property boom, a small area in the centre of Tokyo was reputed to be worth about as much as the total land value of California.

Japanese households and businesses borrowed like crazy to play the enriched Casino; businesses borrowed massively, but to speculate on financial assets, not to expand or modernise their own businesses.

It all fell apart, inevitably. After their 1991 crash, Japanese households and businesses, en masse, found themselves holding huge amounts of debt, and near-worthless financial assets. Economy-wide, the story was much the same – private financial insolvency. All firms scrambled to repay debt; few were willing to take on new debt. Contrary to advice from western financial experts, Japan’s government realised that only it could save the day. The government started to borrow, to offset (and facilitate) household and business repayments. It worked. A shallow but long-lasting period of close to zero growth – a decade and a half of it – became the new normal; the alternative was a catastrophic depression. Not only did Japan save itself by breaking all the rules of conservative public finance, it has continued to retain its position as one of the three biggest economies in the world.

Today, Japan’s 250 percent (of GDP) public debt is its strength, not its weakness. It is financially strong enough to run an Olympic Games in 2021, even without crowds if that turns out to be necessary. Japan is strong today because it never tried to ‘repay’ its 1990s’ public debt. Japan is strong because its public finances are underpinned by creditor households supporting a debtor government. By lending to their government at zero percent interest, Japanese are foregoing some consumption just as they would by paying the money as taxes. However, any particular Japanese savers may withdraw their funds if confronted with an unexpected household situation that requires use of those funds. Japan’s public finance works like an efficient public insurance program.

We also note that, in Japan in the 1990s and early 2000s, businesses continued to grow with minimal business borrowing. Indeed, Japan’s economy continued to export more than it imported despite this lack of traditional business investment. Japan showed the rest of the world – although the rest of the world did not see – that an advanced economy could remain productive and competitive without relying on the traditional capitalist dynamic of household saving and business borrowing. Rather than being utilised by local businesses, Japan’s household savings were absorbed by governments and by foreigners. Interest rates in Japan have been around zero for decades.

The 2008 Global Financial Crisis and ensuing Recession

The years from 2000 to 2008 were characterised in much of the capitalist world by increased household deficits and unanticipated business surpluses; the reverse of the presumed norm. Governments sat back, not realising that it was households rather than businesses which were spending on credit, pumping money into the Economy and into the Casino. Further, businesses were ‘investing’ their saved profits into the Casino, trying to generate speculative returns, much as Japanese businesses were in the late 1980s.

Much as occurred in Japan 17 years earlier, the 2008 crash happened in the United States and elsewhere; massive numbers of businesses and households became technically insolvent. There was no deflation this time, though interest rates – which dropped substantially from 2007 levels – continued to exceed inflation rates. Households and businesses generally became debt averse, though businesses were not indebted to the same extent that their counterparts in Japan had been.

The problems that delayed the recovery from the Great Depression were not there. Exchange rates were flexible – and behaved predictably, in the sense that money returned home from the many exotic destinations it had been sent to. The exchange rates of the bigger and richer economies went up, and the other exchange rates went down. It was cheap for governments to borrow in 2009, because there was minimal deflation to cope with. Debt deflation had not had time to take hold, thanks to a very rapid and global Keynesian response – called the ‘fiscal stimulus’. Policymakers had learned some useful lessons from the Depression.

The bigger story after 2009 turned out to be the second wave of the Global Financial Crisis; mainly the crisis in the European Union (EU). The EU prematurely abandoned its fiscal stimulus, by introducing public ‘austerity’ and ‘fiscal consolidation’. Unlike what happened in Japan, the European governments tried to ‘pay back’ the money. While the consequences were tragic for Southern Europe, the austerity policies also generated much political extremism all over Europe in the 2010s. The consequences of European austerity were offset – fortunately for the capitalist world – by widespread spending and borrowing in the emerging tier of capitalist economies: the likes of India, Russia, Brazil, Turkey, Indonesia, South Africa, and especially China. Most particularly, it was China’s expansionary policies that saved the world from experiencing a balance sheet recession to rival that of the 1930s.

The European Union ‘got away’ with its austerity pro-depressionary policy by running a decade of foreign-sector deficits; that is, other countries borrowed to accommodate Europe’s excess saving. There is no guarantee that the rest of the world will be as accommodating next time; indeed, a lack of ‘rest of the world’ accommodation in the 1930s ensured that there would be a global Great Depression. A part of the accommodation to Europe’s austerity in the 2010s was a substantial amount of private sector (household and business) deficit spending by New Zealanders; and it was that private deficit spending in New Zealand that enabled the New Zealand government to run Budget surpluses after 2015. In financial accounting, ‘deficit’ is NOT a dirty word; it’s simply a negative number.

In the 2010s, New Zealand pursued an austerity-lite approach, benefitting from a rising terms of trade (meaning export revenues grew rapidly on account of higher prices, while import prices fell). By taking advantage of a lucky recovery – a recovery spurred by Chinese and Australian spending – New Zealand missed the opportunity to address its structural inequalities, in favour of pointlessly getting public debt down to 20% of gross domestic product (GDP). Further, New Zealand’s apparent success depended critically on New Zealand households and businesses eager to run deficits – to borrow and spend. As might have been expected, much of that private borrowing was spent in the Casino rather than in the Economy. Hence New Zealand’s inflated real estate market that peaked in 2017, and appears to have taken off again in 2020.

The Balance Sheet of the Reserve Bank of New Zealand

The Reserve Bank of New Zealand (RBNZ, or RB) recently published the following on its website: COVID-19 and the Reserve Bank’s Balance Sheet. (See this chart of the Bank’s balance sheet.)

Where does the money come from for governments to run ongoing expansionary fiscal policies; that is, spending at all levels of government financed by a mix of taxes and borrowing?

The abovementioned chart shows the size of the Reserve Bank’s balance sheet since 2002. Because of double-entry bookkeeping, this is both the assets and the liabilities of the Reserve Bank. The sizes shown represent the base of New Zealand’s money supply. New Zealand’s total money supply is essentially the combined balance sheets of all the country’s banks. The assets of banks are their loans. It means that New Zealand’s money is technically a debt to the banks, and ultimately to the Reserve Bank. The liabilities of banks are their deposits, and their capital (which is their shareholders’ equity). The economic citizens of New Zealand are the shareholders of the Reserve Bank.

When the Reserve Bank increases the size of its balance sheet by adding to both sides, it simultaneously adds to its loans and to its capital. Thus, there is an increase in the amount of ‘money’ that the citizens of New Zealand owe to the citizens of New Zealand.

What then happens is that the Reserve Bank attempts to ‘inject’ that new money into the economy by either (a) lending it to its usual depositors (ie the banks or the government) or (b) by ‘buying bonds’ in the secondary marketplace (ie in the Casino). In the former case (a), on the liabilities side of its balance sheet, the newly created ‘capital’ becomes a ‘deposit’ of the borrower; and that borrower is free to spend or relend that money. In the latter case (b), the Reserve Bank takes over an existing debt (eg a company or government ‘bond’) as an asset, and the money paid to purchase that bond appears in its balance sheet as a deposit liability.

Under normal circumstances the combined balance sheet of the banking system should expand at the rate of ‘nominal economic growth’; that’s the ‘real’ economic growth rate (typically three percent in a year) plus the inflation rate (typically one percent in a year). Thus, over the ten years from 2010 to 2019, we would expect the ‘size’ of the banks’ combined balance sheet to have increased by an average four percent per year. Over a period of decades, we would expect the same average for the Reserve Bank’s balance sheet (ie the balance sheet depicted on the chart referred to); though there tends to be periods where most of that monetary growth is on the commercial banks’ balance sheets, and other (usually shorter) periods when most of the growth is on the Reserve Bank’s balance sheet.

The chart shows basically a flat RB balance sheet from 2002 to 2006, then a catchup from 2006 to 2009, and then another flat period from 2009 to 2019. Finally, the chart shows a substantial jump in 2020. (We also need to note that the chart is somewhat distorting, because it uses an ‘arithmetic’ rather than a ‘logarithmic’ scale of values. See my recent set of Covid19 charts that shows how different charts can look, depending on which scale is chosen. This RB chart understates the changes in the 2000s’ decade – values more than doubled from 2006 to 2009 – and exaggerates the 2020 increase, which represents a doubling of the size of the RB balance sheet.)

What is most important to note here is that the money created and lent in the 2006 to 2009 period has not been ‘paid back’, and never should be. Repayment to the Reserve Bank of that money – in say the late 2010s – would have represented a collapse of the RB balance sheet back to early 2006 levels; an economic disaster.

So, in terms of public finance, what happened in the late 2000s is that the RB purchased lots of commercial and government ‘bonds’ (ie debt assets) from the Casino, and – from 2008 to 2014 – the Government funded its deficits by selling newly issued bonds to the Casino. The Casino acted as a ‘middleman’; an intermediary. The Government borrowed from the Casino, and the Reserve Bank lent to the Casino. The net – and perhaps unnecessarily convoluted – effect was that the Government borrowed new money, indirectly, from the Reserve Bank. The money created by the Reserve Bank went – in part – into circulation into the Economy, through the ‘vector’ of government deficit spending. (The rest of the money created on the Reserve Bank’s balance sheet either entered the Economy through private deficit spending, or entered the Casino as loans used to purchase existing assets such as city real estate.)

In the second half of the 2010s, the Government ran Budget surpluses, meaning it ‘paid back’ some of its debt. It repaid debt to the Casino, but the Casino did not repay the Casino’s creditor, the Reserve Bank. Rather the Casino relent the money that the Government repaid; the Casino relent that money to household and business borrowers, and much of that relent money circulated within the Casino rather than within the Economy.

The net effect, was that the Government paid back money that it did not need to pay back; it repaid money that could have been spent on social housing or on teachers’ salaries or on the healthcare system. And the repaid money did little more than further stimulate the Casino, helping to push up the prices of financial assets.

The repaying of that Government debt represented a case of ‘double jeopardy’; it meant the loss of the many good things that the Government could have spent the money on, and it meant that the prices of financial assets – including residential property – became even more inflated than they otherwise would have become. The flipside of the government’s austerity-lite policy was the housing crisis of 2013 to 2017.

To repeat, the Government debt incurred around the time of the Global Financial Crisis of 2008 was never repaid to its ultimate creditor, the Reserve Bank. Rather it was repaid to the ‘money markets’ (the Casino) who relent it to private borrowers. There is no evidence whatsoever that the private borrowers spent that money in ‘better’ ways than the government could have spent it.

Covid19: The Economy versus the Casino

So, what will become of our present balance-sheet recession, the Covid Global Recession (GCR?)? First, this has the potential to become a global balance sheet recession comparable in severity to the Great Depression. And second, most of the chatter – coming from the media, government spokespeople, mainstream political parties, and most economists who feature in the media – is the capitalist world talking itself into a funk about ‘having to pay the money back’ and ‘intergenerational equity’. Somehow – the confused reasoning goes – future generations will become better off if, in the 2020s, governments opt for ‘depression’ (paying back debt incurred in an emergency) rather than ‘investment’ in people’s lives.

This is frightening chatter, which suggests that we have learned nothing at all from the previous balance sheet recessions which I have cited above. Further, it suggests a naivete about public finance that is substantially worse than that displayed during the Great Depression. In the Great Depression there were real and genuine excuses why governments failed to borrow and spend; at least at that time governments did eventually act, albeit too little and too late.

The Great Depression was a ‘voluntary depression’, in that governments largely chose not to borrow and spend when the only way out of this global event was for governments to borrow and spend.

Most of the chatter that I am hearing tells me that we are heading towards a global environment in which an insolvent private sector – households and businesses – will be desperately trying to run financial surpluses, while governments will be actively trying to minimise their financial deficits. The West cannot reasonably look to China to bail it out this time. This chatter is a recipe for a global depression – an optional or voluntary global depression – that could last many years.

At least in the Great Depression, the Casino had become largely dysfunctional. This time looks like being different. Much of the huge amounts of money being created in the world’s central banks (such as the RBNZ) are getting into the Casino, and circulating there, because governments are far too cautious to utilise the money that the central banks have created. Much of the money that the Government should be injecting into the Economy will instead circulate in the Casino. Further, premature repayment of government debt just pushes even more money into the Casino.

We are already seeing a ‘surprising’ lift in asset prices; house prices in New Zealand, share prices in other countries such as the United States. It’s a result of central banks creating the money that the 2020s’ economy needs, but the governments of the world rebuffing the central banks, forcing money that could do much good into the Casino where it can do much harm. This would be double jeopardy – given a choice of ‘good’ versus ‘harm’ – the governments and the people who elect them seem more intent than ever to choose ‘harm’.

There is one note of optimism, however. In the wake of yesterday’s PREFU – pre-election financial update – today I heard three people mention the term ‘modern monetary theory’ (economists Shamubeel Eaqub and Ganesh Nana; and journalist Corin Dann). (See my Money: Where Does it Come From, Where Does it Go?.) I have never before heard the words ‘modern monetary theory’ on Radio New Zealand. Further, such relatively enlightened economists – though still subject to professional constraints – are starting to admit that public debt is largely money that we owe ourselves, and that the repayment of such debt is not a necessary thing. (We must note that the non-repayment of debt is not the same as debt default; it’s much more that certain types of debt may be perpetually ‘rolled-over’.) These economists are calling for ‘conversations’ about public finance to take place – conversations that I have been trying to facilitate.

Centuries of Government Deficits

In 2009, the New Zealand government was talking about a coming ‘decade of deficits’ as a consequence of the Global Financial Crisis. This was generally interpreted as ‘a bad thing’, even though Japan had showed the rest of the world that government deficits should not have been thought about in this problematic way. Certainly, most of the world’s governments – though not New Zealand’s – got their decade of deficits; an inevitable self-defeating outcome of unusually high levels of financial caution. The 2010s’ decade became a period of high levels of savings, on the part of the world’s households and businesses; and high levels of debt aversion on the part of governments. It is not possible for governments to avoid running deficits when households and businesses both insist on running surpluses.

By definition, for governments – or any other parties – to incur debt means to run financial deficits, and to pay back debt means to run financial surpluses; generally many years of government surpluses. While government surpluses may have been common in a few oil-rich countries, there has probably never been a year – let alone a sequence of years – in which the global government sector has ‘paid back debt’. Government debt is a critical component of the global financial balance sheet. Government debt is a critical component of human ‘civilisation’.

For the coming century to be economically successful, we as a species need to learn to embrace appropriate government financial deficits; as ‘governments doing their job’. While government debt needs to be contractually serviced – it should never be ‘paid back’ if, by so doing, it either has an adverse impact on the circulation of money or helps to fuel the financial Casino, raising the prices of financial assets above their fundamental levels. (The fundamental price of residential land, is the price that renters of that land can reasonably be expected to pay.)

So yes, we should be looking to another century of deficits of the worlds’ governments, as a good thing. Government deficits – despite our unthinking aversion to them – were the central recipe to the advanced state of economic development that took place throughout the world in the twentieth century.

Instead of all our talk of ‘governments paying back the money’ that they must borrow, we should be debating how money should be allocated, and ensuring that we have equitable tax and benefit systems that properly stabilise economic perturbations large and small.

John Maynard Keynes wanted governments to run deficits in difficult times and surpluses in good times. Japan has showed that governments should be running large deficits in bad times, and small deficits in good times. Such deficits do not stifle households and businesses. While government deficits will always have a cyclical aspect, we need to accept government debt as a structural component of sustainable democratic capitalism. What Japan has learned to do with its public finances does work; and it neither leads to unsustainable economic growth nor to the crowding out of genuine private sector economic activity.

Ref. Radio New Zealand interviews mentioned (both 17 Sep 2020):

Economist concerned government’s plan for growth worsens inequality

Treasury forecasts rising unemployment and slow recovery

Developing countries of Asia and the Pacific are experiencing unbalanced tolls of the COVID-19 pandemic. Grim milestones in infections and deaths have left countless devastated. Yet, we must look at the economic and social impacts in small island developing States (SIDS), where setbacks are likely to undo years of development gains and push many people back into poverty.

Compared to other developing countries, SIDS in the Asia-Pacific region have done well in containing the spread of the virus. So far, available data indicates relatively few cases of infections, with 15 deaths in total in Maldives, Guam and Northern Mariana Islands. Yet while rapid border closures have contained the human cost of the virus, the economic and social impacts of the pandemic on SIDS will place the Sustainable Development Goals (SDG) even farther out of their reach. This is worrying as SIDS in Asia and the Pacific were only on track to reach SDG 9: Industry, Innovation and Infrastructure and SDG 12: Responsible Consumption and Production and as they had in fact regressed in SDG 8: Decent Work and Economic Growth, a crucial driver of inclusive development and key to reaching all SDGs.

One reason SIDS’ economies are severely impacted by the COVID-19 pandemic is their dependence on tourism. Tourism earnings exceed 50 per cent of GDP in Maldives and Palau and comprised 30 per cent of GDP in Samoa and Vanuatu in 2018. Measures to contain the COVID-19 pandemic, including restricting entrance to countries and halting international travel, will have a profound impact on the development of these economies in 2020 and beyond, with estimates of international tourist arrivals declining globally by 60-80 per cent in 2020. The pandemic has particularly affected the cruise ship industry, which plays an important role in many SIDS.   

The severe impact of COVID-19 on these economies is also a result of heavy reliance on fisheries, which represent a main source of SIDS’ marine wealth and bring much-needed public revenues. The COVID-19 pandemic crisis will jeopardize these income streams as a result of a slowdown in fisheries activity. However, it is important to note that the COVID-19 pandemic may also create a small window for stocks to recover if it leads to a global slowdown of the commercial fishing industry.

Despite the tourism and fisheries sectors’ susceptibility to shocks, ESCAP’s latest report, the Asia-Pacific Countries with Special Needs Development Report: Leveraging Ocean Resources for the Sustainable Development of Small Island Developing States, emphasizes fisheries and tourism will remain drivers of sustainable development in small island developing States of Asia and the Pacific. They are among the most important sectors in their contribution to output and their importance for livelihoods. In the short term, addressing the consequences of the COVID19 pandemic must take priority, but the long-term global context will usher in an era supportive of tourism development in Asia-Pacific SIDS. This is due to an increasing demand from the emerging middle class of developing Asia and the ageing society in the developed countries on the Pacific Rim.

As part of post COVID-19 recovery, new foundations for sustainable tourism and fisheries in Asia-Pacific SIDS must be built. These sectors must not only have extensive links to local communities and economies, but also be resilient to external shocks. Enhancing economic resilience must focus on building both the necessary physical infrastructure and creating institutional response mechanisms. For example, a ‘green tax’ for tourists can generate revenues for environmental protection. Such fees serve as an additional benefit for local populations and regulate the impact of tourism on SIDS’ fragile natural environment. SIDS may consider innovative financing instruments like blue bonds and and debt for conservation swaps to expand their fiscal space. Open data sharing, and the collection, harmonization and use of fisheries data can be strengthened for integrated and nuanced analysis on the state of fish stocks.

Given the limited capacity of the health-care systems of many Asia-Pacific SIDS, shutting down access to many of these economies was a wise and necessary short-term policy choice. Opening ‘travel bubbles’ with countries where the virus has been brought under control is now important. In the longer term, the effective implementation of the 2030 Agenda for Sustainable Development must take priority. This entails ensuring sustainable use of existing ocean resources and developing sectors that provide productive employment, including specific types of tourism and fisheries.  SIDS can do more to embrace the blue economy to foster sustainable development and greater regional cooperation is an important element for creating an enabling framework. Regional cooperation is especially important given the nature of fisheries as a common property resource and the remote locations of most Asia-Pacific SIDS.

The COVID-19 pandemic has provided a stark reminder of the price of weaknesses in health systems, social protection and public services. It also provides a historic opportunity to advocate for policy decisions that are pro-environment, pro-climate and pro-poor. Progress in our region’s SIDS through sustainable tourism and fisheries are vital components of a global roadmap for an inclusive and sustainable future.

Armida Salsiah Alisjahbana is United Nations Under-Secretary-General and Executive Secretary of the UN Economic and Social Commission for Asia and the Pacific.

Since the Indian Ocean tsunami of 2004, disaster recovery plans are almost always framed with aspirational plans to “build back better”. It’s a fine sentiment – we all want to build better societies and economies.

But, as the Cheshire Cat tells Alice when she is lost, where we ought to go depends very much on where we want to get to.

The ambition to build back better therefore needs to be made explicit and transparent as countries slowly re-emerge from their covid-19 cocoons.

READ MORE: Recession hits Māori and Pasifika harder. They must be part of planning New Zealand’s COVID-19 recovery

The Asian Development Bank attempted last year to define build-back-better aspirations more precisely and concretely. The bank described four criteria: build back safer, build back faster, build back potential and build back fairer.

The first three are obvious. We clearly want our economies to recover fast, be safer and be more sustainable into the future. It’s the last objective – fairness – that will inevitably be the most challenging long-term goal at both the national and international level.

Economic fallout from the pandemic is already being experienced disproportionately among poorer households, in poorer regions within countries, and in poorer countries in general.

Some governments are aware of this and are trying to ameliorate this brewing inequality. At the same time, it is seen as politically unpalatable to engage in redistribution during a global crisis.

Broad-brush policies
Most governments are opting for broad-brush policies aimed at everyone, lest they appear to be encouraging class warfare and division or, in the case of New Zealand, electioneering.

In fact, politicians’ typical focus on the next election aligns well with the public appetite for a fast recovery. We know that speedier recoveries are more complete, as delays dampen investment and people move away from economically depressed places.

Speed is also linked to safety. As we know from other disasters, this recovery cannot be completed as long as the covid-19 public health challenge is not resolved.

The failure to invest in safety, in prevention and mitigation, is now most apparent in the United States, which has less than 5 percent of the global population but a third of covid-19 confirmed cases. Despite the pressure to “open up” the economy, recovery won’t progress without a lasting solution to the widespread presence of the virus.

Economic potential also aligns with political aims and is therefore easier to imagine. A build-back-better recovery has to promise sustainable prosperity for all.

The emphasis on job generation in New Zealand’s recent budget was entirely the right primary focus. Employment is of paramount importance to voters, so it has been a logical focus in public stimulus packages everywhere.

Fairness, however, is more difficult to define and more challenging to achieve.

Rising economic tide
While a rising economic tide doesn’t always lift all boats – as the proponents of growth-at-any-cost sometimes argue – a low tide lifts none. Achieving fairness first depends on achieving the other three goals.

Economic prosperity is a necessary precondition for sustainable poverty reduction, but this virus is apparently selective in its deadliness.

Already vulnerable segments of our societies – the elderly, the immuno-compromised and, according to some recent evidence, ethnic minorities – are more at risk. They are also more likely to already be economically disadvantaged.

As a general rule, epidemics lead to more income inequality, as households with lower incomes endure the economic pain more acutely.

This pattern of increased vulnerability to shocks in poorer households is not unique to epidemics, but we expect it to be the case even more this time. In the covid-19 pandemic, economic devastation has been caused by the lockdown measures imposed and adopted voluntarily, not by the disease itself.

These measures have been more harmful for those on lower wages, those with part-time or temporary jobs, and those who cannot easily work from home.

Many low-wage workers also work in industries that will be experiencing longer-term declines associated with the structural changes generated by the pandemic: the collapse of international tourism, for example, or automation and robotics being used to shorten long and complicated supply chains.

Poorer countries in worst position
Poorer countries are in the worst position. The lockdowns hit their economies harder, but they do not have the resources for adequate public health measures, nor for assisting those most adversely affected.

In these places, even if the virus itself has not yet hit them much, the downturn will be experienced more deeply and for longer.

Worryingly, the international aid system that most poorer countries partially rely on to deal with disasters is not fit for dealing with pandemics. When all countries are adversely hit at the same time their focus inevitably becomes domestic.

Very few wealthy countries have announced any increases in international aid. If and when they have, the amounts were trivial – regrettably, this includes New Zealand. And the one international institution that should have led the charge, the World Health Organisation, is being defunded and attacked by its largest donor, the US.

Unlike after the 2004 tsunami, international rescue will be very slow to arrive. One would hope most wealthy countries will be able to help their most vulnerable members. But it looks increasingly unlikely this will happen on an international scale between countries.

Without global empathy and better global leadership, the poorest countries and poorest people will only be made poorer by this invisible enemy.

Dr Ilan Noy is professor and chair in the Economics of Disasters and Climate Change, Te Herenga Waka — Victoria University of Wellington. This article is republished from The Conversation under a Creative Commons licence. Read the original article.

Article by AsiaPacificReport.nz

Income in an Economy

The chart above shows how income is distributed in an economy. It shows three major sectors: Government, Business and Households. Households are the principal sector; governments and businesses serve households, and are accountable to households. The chart is a pie chart, representing the economic pie. (For now, ignore the outer ring of the pie; the pie is the part divided into sectors.)

In this stylised example of a closed economy (ie no foreign sector), government receives a portion of national income (which is practically the same as gross domestic product). Part of the government income share goes to infrastructure, part goes to collective services like healthcare and education, and part goes on alms and other welfare payments. If the government sector – which includes local governments – saves part of its income, then it runs a surplus. (Repaying debt is a form of saving.)

The business sector both retains income and distributes income to households. The part that it retains – in blue – can be either invested on capital goods and services (eg buildings, machinery, staff training) or saved. If the sector as a whole saves part of its retained income, then the business sector runs a surplus. (Otherwise it runs a deficit, which is simply a negative surplus.)

The same applies to the household sector, represented here by six families: Waititi, Cooper, Patel, Duff, Tan and ‘destitute’. If the household sector saves more than it spends, then it runs a surplus.

By definition, the sum of the sectors’ surpluses adds to zero. So, if any sector is running a surplus then at least one other sector must be running a deficit.

The incomes shown represent entitlements to shares of the goods and services that contribute to the pie. For example, if the Cooper family run a business that makes barrels, then the business sector (or any other sector) may use part of their entitlement by purchasing those barrels. The profits from this cooperage business represent both income to the Cooper business and income to the Cooper household, enabling the Coopers to buy other stuff.

Surpluses and Deficits

If most households save part of their incomes, then the household sector most likely runs a surplus. (In most countries the household sector runs a surplus most of the time.) We generally expect the business sector to run a deficit about equal to the household surplus. That leaves the government sector with a balanced budget. However, if the business sector does not run a large enough deficit, then the government sector must run a deficit too. If, under these circumstances the government sector resists running a deficit, then not all the goods and services in the pie will be purchased, and the whole economy will shrink next year. (Imagine a missing slice from next year’s pie; that slice is called unemployment, or, strictly, ‘involuntary unemployment’.)

In this chart, debt is easily understood. Most likely the Waititi family does not wish to spend its full income entitlement; and maybe this year the Duff family wants to spend more than its income entitlement. So the Waititis can – directly or indirectly – transfer some of their present entitlement to the Duffs. The usual arrangement will be that the Duffs agree to transfer  – directly or indirectly – a slightly greater amount from a future year’s pie to the Waititis.

The Waititis run a surplus this year, and the Duffs run a deficit. The Waititis contract to run a deficit in the future, so that the Duffs can run a surplus in the future. That is what a debt contract is; a commitment on the part of a creditor who runs a present surplus to run a future deficit, a commitment to be repaid. (The Waititis can defer this future obligation if sufficient new debtors can be found, in the future.)

Economic Growth

If next year’s income pie is bigger than this year’s pie (ie it contains more goods and services), we call that economic growth.

Inflation

The market may put a dollar value on this year’s income pie. If we produce essentially the same pie next year, but the market places a higher dollar value on next year’s version, then the economy has experienced inflation.

Relaxation

The ‘relaxation’ ring around the pie represents the extent that our economy is not ‘maxed out’; it’s the reserve capacity of the economy. It represents the ‘life’ part of a society’s work-life balance. (Economists call this ‘voluntary unemployment’; many do not realise that voluntary unemployment is a vital part of our wellbeing.) Our economic happiness is measured by the enjoyment that we get from consuming the goods and services that we buy, plus the opportunity to chill out and enjoy what we have.

We could increase our living standards by increasing the size of the relaxation outer ring, while keeping the economic pie the same size. Or, we could increase the size of the pie while keeping the size of the outer ring unchanged. While both possibilities reflect an increase in both living standards (aka economic happiness) and the productive capacity of the economy, only the second of these options would be measured as economic growth. Thus many economists have a growth bias in favour of that second option.

There are other options that represent increased economic happiness. The ‘relaxation’ option that needs to be mentioned here is to have a smaller income pie, and a bigger outer ring. This is the option that, coming out of the Covid19 pandemic, makes most sense. We will want to spend less – to buy fewer goods and services – while retaining a highly productive market-based economy. The solution to the Covid19 economic crisis is a structural readjustment to our work-life balance, maintaining economic capacity while spending and working less.

The Pie Chart representation has a Weakness

The sixth household – ‘destitute’ – does not appear on the pie chart, but does appear in the chart’s legend; the ‘legend’ is the table of labels to the right of the chart.

‘Destitute’ is statistically invisible, unless made visible by including it in the table. ‘Destitute’ has no income, no work-life balance. In this situation, the destitute household has little choice but to try to run a deficit, but will struggle to find a creditor. Failing that, destitute can only survive by alms, known by economists as income transfers.

Alms are good, but economic rights are better. Surely ‘destitute’ has some economic rights; rights that grant it at least some income from the pie? Yes, but only if society is grown-up enough to acknowledge and properly confer such rights. Otherwise ‘destitute’ remains visible only to those who will see.

How rotten is New Zealand, given the state of poverty at the end of 2019? And why do politicians and the public allow it? These are the questions that might be asked in the lead up to Christmas this year, given the wealth of information we have on disadvantage and suffering at the moment.

Auckland City Mission is currently carrying out their annual distribution of Christmas care packages across the city, but the reports resulting from this are pretty bleak. This week the head of community services development for the Mission, Brook Turner, pointed to the rising poverty and desperate situations facing beneficiary and working families as we come into the holiday season. He says “At Christmas that’s a pretty rotten thing to be happening to Kiwis” – see Carmen Parahi’s Auckland City Mission Christmas service sees families queue all night for parcels.

According to this report, the City Mission now distributes its relief from four centres instead of the traditional CBD one, and demand is badly exceeding supply: “Each centre is part of the Auckland City Mission’s Christmas service to distribute 200 family care packages per day for eight days. On the first day each centre reported turning away 50-100 families. They were expecting people would miss out every day. At Ngā Whare Waatea Marae, Māori Wardens were on site for most of the night keeping people safe as they queued. By 10pm, 60 families were camped and at 6.30am several hundred were waiting. Many missed out by the time the gate opened.”

Some families are travelling from long distances outside of Auckland to queue overnight. The Mission’s Turner reflects on this: “We were quite astonished by that. It speaks to how far those who are in need are willing to go to get the help they need.” He said it was a sign of rising inequality, food insecurity, living costs and issues around financial hardship, not just for those on benefits but also people who were working.”

TVNZ’s John Campbell visited some of those queuing at the City Mission’s Eden Park distribution centre this week, saying the existence of the centres is “a stark reminder of poverty in New Zealand”, and reported that of those camping out, “30 to 40 of the 200 people at Eden Park were children” – see: John Campbell kneels next to sleeping child at food bank, livid at state of poverty in NZ.

Reflecting on the situation, Campbell said, “People are sleeping on concrete outside and they are sleeping to get food and presents for Christmas. Imagine having to do that”. Furthermore: “This is our country and there’s no point pretending this isn’t our country because it is, and those of us who are journalist’s see it quite often. Those of us who work in this sector see it all the time.”

Campbell reports on one mother queuing at the centre: “She caught the bus before 6am, carrying two suitcases to bring back kai for her whānau, because otherwise they wouldn’t have enough.” Apparently, “The mother-of-one said she goes without power most weekends, telling her family it’s ‘like camping’.”

The poor state we’re in

The Auckland City Mission has been trying to estimate the severity of New Zealand’s food shortage problem. General Manager for Social Services Helen Robinson, who has just completed a MA on food insecurity, says “about 500,000 Kiwis are too poor to afford appropriate food” – see 1News’ ‘This is a public health crisis’ – City Mission calls for food insecurity measure to understand issue of poverty.

The government no longer measures food poverty, and that’s something Robinson is trying to change: “With the best information the mission has, we believe about 10 per cent of New Zealand is food insecure. So [there are] about 500,000 people in our country, like the hundreds that you have seen today, who don’t have enough appropriate food. What we’re calling for is to measure that.”

Robinson has also written about her disbelief that the situation is so bad: “I couldn’t understand why, that in New Zealand – this beautiful land of plenty, people simply didn’t have enough food and were forced to seek support to feed themselves and their families” – see: Christmas is about food and family – but not for all.

And it’s only getting worse: “Over the last few years, the need has increased. Our most recent information shows a 40 percent year-to-year increase in demand for emergency food parcels.” And, it’s not just a problem of those without work: “Some are working more than one job but still can’t meet all their living costs.” Such people, according to a survey of 650 people using the Mission’s food bank, are having to frequently “choose between buying food and meeting other essential costs.”

For more on the Auckland City Mission’s “8 Days of Christmas” operations, and why it’s expanded to new distribution centres around the city, you can listen to an interesting RNZ documentary – see Liu Chen’s Food parcels’ distribution on four sites to avoid ‘humiliating’ queues. Chris Farrelly, the Auckland City Missioner, explains why they shifted to four new centres outside of the CBD: “These long queues in Hobson Street stretching all night – we stopped that. There was no dignity. It was quite a humiliating”.

Other agencies are also reporting a worsening situation for those at the bottom. Trevor McGlinchey from the Council of Christian Social Services reports that charities are “telling him that demand for food is growing” – see Sarah Robson’s 10% of Kiwis experiencing food insecurity. Apparently, “An organisation that may have been distributing 100 food parcels a month five years ago today will be distributing 200 to 300 food parcels a month.”

Similarly, see Cate Broughton’s Overwhelmed charities say child poverty in NZ as high as ever. This article reports on the charity KidsCan, which helps children in low-decile schools, saying it’s facing “continued high demand for its support”, and over “the past five years the number of schools supported has almost doubled, from 388 to 740.”

New reports on poverty 

Last week the Children’s Commission released its annual stocktake of the state of child poverty – the Child Poverty Monitor – produced in conjunction with the University of Otago, and it was generally bad news – see Thomas Manch’s Child Poverty Monitor shows 148,000 children are living in material hardship.

According to this report, “More than one in 10 children in New Zealand are living in material hardship, and tens of thousands are going without healthy food.” And Children’s Commissioner Andrew Becroft is quoted saying that families are not able to keep up with the “ever-increasing costs of daily living, like rent and putting food on the table”.

Elsewhere, Becroft warned “We are in danger, as a country, of marginalising a group of kids and reinforcing generational disadvantage”. See Dan Satherley’s report, More Kiwi kids living in low-income households, suffering hardship, for more details of the report.

Another report, came out recently about working households living in poverty, which was carried out by AUT’s New Zealand Work Research Institute on behalf of the Human Rights Commission, and claims to be the most detailed research ever carried out on the working poor in New Zealand – see Vita Molyneux’s The staggering number of Kiwi workers living in poverty.

According to this, 50,000 households – or seven per cent – are living in poverty “despite containing at least one person who is in paid work.” The report warns of a renting “underclass” being formed due to the extreme cost of housing.

Worsening inequality

The Ministry of Social Development has recently released its annual statistical report on household incomes – you can read this here: Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2018.

This report “makes for depressing if not surprising reading” according inequality researcher Max Rashbrooke, who provides a very useful overview in his blog post, Inequality and poverty: A summary of the 2019 household incomes in NZ report.

He says that, “Economic inequality remains at the very high level the country was left with in the late 1990s following 15 years of market-based reforms.” According to his calculations, based on the report, New Zealand’s level of inequality are now “noticeably higher than the OECD average”.

And Rashbrooke suggests that things have even worsened compared to Britain: “Looking at the share of income going to the various fifths (quintiles) of the population, New Zealand is now slightly more unequal than the supposedly class-ridden UK, with its poorest fifth taking less, and its richest fifth taking more, than their British counterparts”

Part of the problem is the global financial crisis that occurred a decade ago, leading to dramatic changes. However, in the decade since the crisis hit, the Herald’s business editor Liam Dann says the burden has been shared very unevenly, and not everyone has fared so badly: “if you started the decade with assets it’s been a golden age. If you started the decade poor you’ve probably gone backwards. While structural inequality has always been part and parcel of capitalism, it was supercharged by the fallout from the global financial crisis” – see: The bad joke that spoiled a golden decade (paywalled)..

Looking at changes in wealth over the decade, Dann says: “If you had all your wealth in the NZX-50 since the end of 2009, you’d have seen it increase by more than 300 per cent. If you had your wealth in housing you’d have doubled it – at least. If you were relying on wage growth to get ahead, well, I hope you got a promotion or two.” He therefore concludes that “the world still seems an uglier, less friendly place in 2019.”

Finally, although the ultimate solutions to the problems of poverty are political, individuals can still ameliorate the rotten symptoms of a severely unequal system, and Josephine Franks details how in her article, Giving at Christmas: How you can help Auckland’s homeless and others in need.