Small countries like New Zealand have a comparative advantage in good government.

Listener: 25 March, 2006.

Keywords: Governance;

At the end of the 1970s, we had to decide whether to have a high or low dam on the Clutha River. The Labour Opposition took a firm position. On the same day, its environment spokesperson said the party favoured the low dam, while the energy spokesperson said the party’s policy was for the high one. Mike Moore impishly explained that the plan was to make the dam high on one side and low on the other.

That’s the advantage of being in Opposition. You don’t have to have a coherent policy. Even today, one spokesperson announces that there should be more government spending, another that there should be spending cuts; one that there is too much regulation, another that we need more controls. The impression is of an Opposition that is bereft of discipline, and lacking policy.

The way of covering the policy deficit is an unremitting string of personality attacks, often based on thin allegations, punctuated by feeble calls of “resign”, no matter how distant the Cabinet minister was from the alleged problem. It is surely enough to make a decent person shun a career in Parliament. Fortunately, however, some excellent people were elected to Parliament last year.

This may seem to have little to do with the economy, but in recent years there has been a growing realisation that good governance is crucial for economic success. The parliamentary Opposition attacks have done little to improve its quality – they seem to think there is nothing wrong except they could do a better job. But the personality attacks, from all sides of the House, are undermining the nation’s faith in our governing institutions, while disguising that the critics have no policies – except “tax cuts” (that is for another column). Just what is accomplished in governance terms by hounding a minister to resignation for alleged long-past personal indiscretions?

Because of their greater homogeneity and socially intimacy, small countries, above a minimum size, tend to have better governments than large ones. Things get done efficiently without corruption; there are fewer pressure groups, so problem resolution is easier. The economy benefits. However, the system needs to tolerate diversity, in order to reduce the oppressiveness of the majoritarian state. Toleration liberates economic innovation, too.

Decentralisation is also vital. In The Size of Nations, Alberto Alesina and Enrico Spolaore argue that the one exception of a large state with poor governance is the US, because it is so decentralised that in a sense it is 50 economies. Others argue that the US is not well governed – the economy performs well because of its resource base and the vigour of its people.

A good decentralisation mechanism is the market, which allows price signals to co-ordinate individual decisions. It is not perfect, but in many areas it is the best we have. In others, it is as good as any alternative.

Small countries probably deliver their public spending better than large countries, which means they may spend relatively more. In effect, small countries have a comparative advantage in public spending and good governance.

What about economies of scale – the tendency in some industries and activities for unit costs to fall as production runs get bigger? They rule out small economies producing everything. Instead, they have to specialise, exporting what they can do well and importing what they cannot. The specialisation need not be solely on comparative advantage principles – such as where pastoral products are exchanged for machinery. The competitive advantage of intra-industry trade can mean that we will sometimes export and import similar things: pharmaceuticals to Europe and pharmaceuticals from Europe; IT to the US and IT from the US; films to Hollywood, films from Hollywood. This requires innovation, technical sophistication, high labour skills, design, branding and servicing customer needs. Many small countries meet the challenge. We are going to have to, too.

We rightly fear foot and mouth disease for the damage it can do to our economy. But perhaps the foot-in-mouth disease that bedevils Parliament is a greater threat. Wouldn’t it be awful if an Opposition were to become the government – bereft of policy – and discover that because of their unthinking attacks they have seriously damaged the quality of the governance they were taking over?