Wednesday 13 May 2015

Regression Analysis of Findings in the Horizon Research Ltd Survey New Zealanders’ Climate Change Actions and Attitudes Development

By Scott White, Motu Intern

In mid-2014, researchers from Motu Economic and Public Policy Research and Victoria University of Wellington collaborated with Horizon Research Ltd with support from the Sustainable Business Council to survey New Zealanders about their climate change beliefs and household actions that reduce emissions.  Results are reported in Horizon Research Ltd (2014) and discussed in Leining and White (2015). This manuscript details the regression analysis of the survey data which is referenced by Leining and White.

Wednesday 5 March 2014

Choosing the Good Wood

We have a special guest post this week from John Alexander Gomez.  John is a student of environmental economics at the University of the Andes in Bogota,  Colombia.  John's post is about government policies designed  to reduce the level of illegal logging in Columbia.  These kinds of policies could be very useful for countries who import timber from countries where illegal logging is a problem, and will undoubtedly be useful in global efforts to reduce carbon dioxide emissions from deforestation.

"Currently, the World Bank affirms that 42% of the total timber production in Colombia comes from illegal logging (Ministerio de Ambiente, Vivienda y Desarrollo Territorial, 2011).   In Colombia, illegal wood is timber which is extracted, transported, processed, purchased or sold in ways that are contrary to the law. Illegal logging is associated with two interrelated problems.  First, illegal logging places pressure on forest ecosystems.  Second, it jeopardizes the survival of many endangered species.

The Colombian government has been working to control this phenomenon but there are several limitations. It recognizes that regulatory mechanisms are used poorly because of operational weaknesses, insufficient infrastructure and resources, and low local population participation. Additionally, because illegal forestry can be performed at low cost and with low investment, it can be performed either on big scales or just for satisfying basic needs, which makes it an activity that is difficult to detect.   

The fight against illegal timber is a priority for the current government. It is one of the stated goals in the National Development Plan 2010-2014, which provides the guidelines for national government policy. Up until now there have been no effective results on the topic.  The most relevant achievement to date has been a non-binding intersectoral agreement that has helped to highlight the problem of illegal logging on the national agenda.

Because the effects of illegal logging represent a welfare loss for society, different economic agents could be willing to compensate those timber producers who have responsible production methods. Whether they are the final consumer or just an intermediate producer, they could gain some type of reward for assuring their resources come from a legal activity. However, all producers have incentives to present themselves as legal producers, even if they are not. If the producer does not have an accurate way of signaling themselves as legal producers, those who derive utility from knowing their timber comes from a legal source have less incentive to reward legal producers.  In the end, the lack of information is punishing responsible producers who follow the law and because of that incur additional expenses.

If the government can provide the needed information to the market, the consumers could identify with more certainty which product comes from legal sources. Certifying responsible products could do this. That means that the government should assure that the certified products come from legal methods of extraction and management. It should assure also that intermediate producers should not lie to their customers about the legitimacy of the timber. Timber producers and suppliers would have three incentives to participate in a certification program. First, legal timber can fetch a price premium, so there is a market based incentive. Second, there may be a first mover advantage. The producers who achieve certification earliest will be able to capture a larger share of the early benefits and may therefore generate a comparative advantage in producing and selling certified timber. Finally, producers could be interested in protecting themselves against potential strengthening of the already existing government regulation, which could imply more onerous fines or greater probability of capturing banned activities of those producers or retailers who still use illegal timber. The certification procedure could help lead to an easier transition to a wholly legal and sustainable market for timber.

For this policy to be successful it needs industry support.  Because illegal wood implies activities against the law at different points of the supply chain, it is important to have support of the different agents involved in it.  Continued illegal logging could reduce the credibility of the certification scheme, so certified participants have an incentive to punish those who defect.  The government also needs to gain the trust of the relevant agents in the market.  The credibility of the information, as well as government’s capacity to disseminate that information is an essential feature for getting firms to participate. Even so, the government´s credibility could be doubtful.  It is still the institution with the greatest power of coercion in the country. The government might need to seek support from other entities to strengthen its credibility. Traditionally private-public or international alliances have been useful to gain credibility.  Institutions like the Forest Stewardship Council (FSC) already have experience in the timber certification process. Finally, the government should try to keep the program as cheap and simple as possible so really efficient results could be achieved. 

A successful policy would also use existing programs and experiences to complement certification policy programs. For example for guaranteeing the supply of legal timber this policy should work with the government’s commercial reforestation policy. This project has been an effort to provide incentives to producers of forest services and products to cultivate their own “forests”. Because of Colombia’s geographical characteristics, we have a comparative advantage in commercial reforestation, although it has not been used because it was cheaper to use natural forests (Ministerio de Agricultura y Desarrollo Rural, 2011). Commercial reforestation could be used to facilitate legal supply and provide an alternative to those who need to transition from illegal to legal activities. The government has already gained recognition with the non-binding agreement mentioned above. With it, government has already constructed a relationship with different agents at different points of the supply chain, and has obtained their commitment to achieve legality of the timber industry. 


Ministerio de Agricultura y Desarrollo Rural. (2011). Plan de Acción para la Reforestación Comercial .
Ministerio de Ambiente, Vivienda y Desarrollo Territorial. (2011). Pacto Intersectorial por la Madera Legal en Colombia. Ministerio de Ambiente, Vivienda y Desarrollo Territorial."

Tuesday 7 January 2014

"My house my castle"

By Fraser McKay, Intern, Motu Economic and Public Policy Research

“My house my castle.” This is a phrase uttered by countless New Zealanders from all walks of life, across different ethnicities, both genders and over a wide range of ages. Put simply, we like buying, selling and developing real estate. Talking about house prices, rental yields and leverage can sustain conversations well into the evenings at summer barbeques. There exists the persistent herd mentality that house prices will continue to rise – such beliefs can have disastrous economic consequences, as evidenced by the Great Depression. The fair value of an asset is the cumulative value of its expected future cash flows, which may be derived from future re-sale or from leasing, discounted back to today’s dollars at a rate of interest at which the capital tied up in the asset could be employed in an alternative use, for example by investing in government securities. Assets cannot sustainably maintain deviations from their fair values, though as Keynes famously noted, “The market can stay irrational longer than you can stay solvent.” Devout believers of laissez-faire would argue that there is nothing inherently harmful about housing bubbles and subsequent price corrections, on the basis that the market is merely reacting to the mutual forces of supply and demand. Few, if any, economists these days are completely anarchist: even Friedman acknowledges the role of government in upholding property rights and basic functioning of law and justice.

For most Western economies such as in New Zealand, it has been deemed appropriate to separate fiscal objectives from monetary and macro-prudential objectives, where the latter is the responsibility of the central bank. In particular, the Reserve Bank of New Zealand (RBNZ) is concerned with maintaining a healthy average level of inflation on the order of 1%-3% p.a., as measured by the Consumers Price Index (CPI). The CPI band does not take into account house price inflation, which for new home-buyers is very much a part of the cost of living. The RBNZ argues that house price inflation is largely attributable to two factors: housing shortages and easy credit, where loan-to-value ratios (LVRs) above 80% account for 30% of new lending. Of late, the monetary authorities have become concerned that this level may be threatened by upward pressure due to beliefs that Auckland housing is significantly overvalued, and due to the risk that house construction in Christchurch could otherwise be financed through high LVR loans. As such, they introduced a policy restricting LVRs greater than 80% on residential property to make up no more than 10% of the portfolio of each and every bank in the country.

The policy has been met with quite strong opposition, mostly from prospective first-home buyers and from the construction industry. While the former group is listed by the RBNZ as one of the reasons why the policy was introduced in the first place, it is the latter that is of more concern. Public opinion suggests dampening rising demand has come at the price of slowing supply. Research from consulting company, Branz, showed 5000 new houses could be jeopardised by applying LVRs to new house construction. RBNZ deputy governor Grant Spencer made a statement earlier this month claiming that while high LVR construction lending is only around 1% of total residential lending, it finances around 12% of residential building activity, which means that low deposit lending will fall outside the 10% speed limit if it is financing new construction. This fact contributed to the RBNZ’s decision to introduce an exemption clause allowing higher LVRs for new housing construction to generate new supply to ease inflationary pressure in the housing market. 

The exemption clause may enable continued development in Christchurch relative to the no-exemption situation. One may have similar expectations for the overheated Auckland housing market. Further, by relaxing the constraints on construction supply, the clause may help support and even boost employment in the construction industry as New Zealand construction workers may now have reduced incentives to migrate overseas in search of more attractive and abundant opportunities; likewise, foreign construction workers may be encouraged to migrate here.

One issue with the initial policy is that it has led to some banks charging higher interest rates on low-deposit loans, effectively imposing price discrimination on would-be first home buyers. This issue, in conjunction with the exemption clause, lends weight to the argument that these prospective home-owners would have increased incentives to obtain finance to construct new residential property, as opposed to saving for the required deposit on a mortgage under the new LVR restriction. 

The RBNZ cannot fix each and every problem within an economy. For political objectives, such as access to housing for those unable to afford it, to be achieved as well, government must take a long-term view and construct and implement appropriate fiscal policies that do not conflict with those of the central bank. What the RBNZ did not take into account in forming its initial LVR policy is the significant effect that wealthy investors, both domestic and foreign, are exerting on house prices – this responsibility may lie more in the hands of central government.

Friday 6 December 2013

Quality not Quantity

By Campbell Will, Intern, Motu Economic and Public Policy Research

Tourism is New Zealand’s second largest export sector; it contributes approximately 12% of GDP and 5.7% of employment (excluding indirect employment). However, a recent report by the Ministry of Business, Innovation and Employment shows that although the number of tourists visiting New Zealand is increasing, they are coming for fewer days and spending less money per visit. A key finding is that the number of tourists from Australia has been increasing over the past decade such that they now make up 45% of all visitors to New Zealand. Importantly, Australians spend less money during their time in New Zealand than tourists from any other country.

The report identified that tourists from the UK on average spend the most and stay for the longest. Also, visitors from all countries stay fewer nights and spend less than they did in 2003. There are some issues with the data and facts as presented in the report. For example, there are potential inaccuracies in the data from people filling in forms inaccurately. Furthermore, Australian tourists are identified as spending less than tourists from the UK per visit, despite Australian tourists spending more on a per day basis. This report offers some insight into where advertising should be made to encourage tourists to come to New Zealand. However, there are a few key things to consider before any decisions are made.

Information on what tourists are spending their money on is particularly relevant for targeting advertising. Advertising that targets tourists interested in an activity such as skiing may be more effective when aimed at Australians rather than tourists from the northern hemisphere, as Australians have a significantly shorter distance to travel. Advertising is potentially unlikely to change the behaviour of tourists from the northern hemisphere as they have many options for skiing that are closer and therefore more affordable than New Zealand. Thus, the marginal returns to advertising in different countries will influence where we advertise. For example, if a dollar of advertising in the UK increases tourism income by $2 but it would increase tourism income by $3 if that dollar of advertising was spent in Australia, then the optimal choice would be to advertise in Australia.

Furthermore, depending on whether tourists are filling empty hotel rooms or buying meat that would have otherwise been exported, the marginal impact of tourists’ expenditure on the economy will vary. Consideration also needs to be made as to what we want from our tourists as there is more to gain than just financial returns. A larger number of tourists visiting New Zealand increases our reputation across the globe and can strengthen relationships between countries. Building our international relationships can have flow on effects in other areas such as business, trade, immigration etc. Therefore, the average tourists’ expenditure may not accurately represent their contribution to our society.

For these reasons it is important that we collect more information on tourists’ expenditure and the effectiveness of advertising before hastily increasing advertising expenditure in potentially the wrong areas.

Friday 29 November 2013

Reduce, Reuse, Recycle

By Corey Allan, Research Analyst, Motu Economic and Public Policy Research

With all the talk about the impact that dairy farms are having on our waterways in the wake of the report by the Parliamentary Commissioner for the Environment, I thought it would be good to highlight some positive steps that farmers are making to lessen their environmental impact.  A recent report by Environment Canterbury into the waste disposal practices of farmers highlights that a new culture of recycling is emerging.

The report says that younger farmers are more aware of the available recycling options and were also more willing to try new things.  There also seems to have been a change in preferences towards more sustainable farming, with younger farmers wanting to do the right thing, and want to understand what the right thing is and how they can achieve it.

It seems that what the farmers are asking for is more information.  More environmentally friendly waste management options are available and some farmers are interested in using them - more just need to know they are there.  Federated Farmers have stepped in to provide this information with their AgRecovery recycling program, which encourages farmers to recycle.

Knowing about the other waste management options is only part of the issue, having the appropriate incentives to recycle in place is also key.  Cities such as Wellington and Dunedin manage these incentives by effectively charging households for the quantity of rubbish they produce.  Council rubbish bags have to be purchased, so there is a marginal cost associated with increasing the quantity of rubbish.  By providing recycling bins which impose no additional cost for a larger quantity of refuse (aside from any increase in rates needed to fund collection and processing), these cities have managed to reduce the amount of rubbish going to landfill.  By making the recycling option attractive to farmers, we could see even larger decreases in the amount of waste that is burned or buried.  Action in one particular area could also encourage farmers to look for new ways to reduce other environmental impacts.

* Here is an interesting piece by Willy Leferink from Federated Farmers, discussing the issue of water quality and what steps farmers are (or can be) taking to reduce their impacts on water quality

Friday 6 September 2013

More than Bricks and Mortar

By Corey Allan, Research Analyst, Motu Economic and Public Policy Research

Of the many complex issues which surround the Christchurch rebuild, one of the most contentious appears to be what to do with the many quake-damaged heritage buildings.  The Court of Appeal recently gave the Anglican Church the OK to 'deconstruct' the Christchurch Cathedral, a decision which campaigners are taking to the Supreme Court.  Just last week, heritage campaigners came to parliament demanding that the demolition of heritage buildings cease.

The reason for this contention comes down to the complex set of values which are in play when we are talking about heritage preservation.  Earthquake strengthening and restoration of heritage buildings is an expensive undertaking; it may simply be cheaper to demolish and construct a new building.  However, this fails to recognize the full set of values which are in play when we are talking about heritage preservation.  Simple monetary metrics struggle to deal with the values people place on heritage.

A recent Ministry of Culture and Heritage research report* details the different kinds of values at play in heritage protection, and the cultural sector in general.  The core issue is that key sources of value derived from heritage protection are non-market values.  Heritage has public good aspects; we cannot exclude someone from enjoying the Gothic architecture of the Christchurch Cathedral from the square.  Nor does one person's enjoyment of heritage diminish or impede the enjoyment of others (known as non-rivalry).  Some of the value accrues to individuals who do not even use heritage.  Some people may derive value from having the option to visit a heritage site, while others may simply value the existence of heritage buildings.  This could be because people value living in a society where heritage is celebrated; it could be because people want the heritage to exist for future generations to enjoy.  Economists call these 'existence values' and 'bequest values'.  These types of values are inherently difficult to quantify.

Policy makers should be conscious of these values when deciding which buildings should be saved.  Revealed preference is not a particularly useful technique in this case.  The community may prefer to save a building which is not the most commercially successful because of the history the building represents.  Not all heritage buildings will be able to be saved - either because they are too damaged or the restoration budget will not allow it.  In choosing which buildings to save or strengthen using public money, the government should be aiming to maximize value for money while recognizing that non-market values play a key role in social welfare in this space.

* This is also available as a Motu Working Paper

Friday 16 August 2013

Circling the Sharks

By Corey Allan, Research Analyst, Motu Economic and Public Policy Research

New Zealand has seen an increase in the number of so-called 'third-tier lenders', such as payday lenders, over the past few years.  Based on where these firms locate, they appear to target low income households.  These lenders offer low value, short term loans to households at often exorbitant interest rates (in the range of 500+% per annum!).  Families can get locked into a vicious cycle of high cost debt, as happened to this Porirua family.

In an attempt to break this vicious cycle, a micro-credit scheme is likely to be introduced in New Zealand.  Micro-credit is the provision of small loans to low income households, who would otherwise not have access to mainstream financial services or reasonably priced credit (known as financial exclusion).  This could be because low income households have little to no collateral or a poor credit history.  Therefore, lower income households may to resort to third-tier lenders.  This makes saving difficult for these households as they must come up with relatively large sums of money in a short time to repay these loans.

An Australian micro-credit scheme, Good Shepherd Microfinance, has achieved remarkable success with its no interest and low interest loan schemes*.  These loans have fairly strict criteria, including what the loans can be used for.  Repayments are made fortnightly with a repayment period between 12 and 18 months.  In addition, Good Shepherd, in collaboration with National Bank of Australia, offer a matched savings scheme.  Savings of $500 are matched dollar for dollar, with no restrictions on access or use.  Clients can access these savings accounts after they have paid off a no-interest or low interest loan,  providing a financial incentive to repay and getting people into a regular savings habit.

Two questions immediately come to mind - why don't mainstream financial service providers offer these products to lower income households?  And does this mean there is a role for some government intervention?  Either as a direct provider or as a backer through some public-private partnership, as in Australia?  We would expect mainstream providers to offer these services if they proved profitable.  A report into Good Shepherd's StepUp low interest loans shows that each loan costs the provider over A$1000*.  Therefore, it may not be profitable for a firm to provide these loans, despite the high repayment rates that many micro-credit schemes enjoy.  This may force low income households to use third-tier lenders to purchase essential household items or pay unexpected expenses.  From a societal viewpoint, it may be beneficial for government or a non-profit organisation to step in and provide these micro-loans.

Does New Zealand need such a scheme?  There are options available to low income households to assist with essential household items and unexpected expenses.  Work and Income offer grants and loans for essential expenses, subject to their eligibility criteria.  For savings, ASB offer the Save the Change scheme, where customers choose an amount to round up each electronic transaction, with the balance being deposited into a savings account.  I think this is a great commitment mechanism to get people into the habit of regularly putting money aside.

The availability of loans for essential expenses suggests that New Zealand may not need a micro-credit scheme like that in Australia.  The government may be better placed providing information on the schemes already running.  However, unlike Australia, New Zealand does not have good data on the extent of financial exclusion.  People may be resorting to third-tier lenders because they are not eligible for the Work and Income schemes.  If this is true, a case could be made for the introduction of a complimentary scheme, with the aim of providing finance to improve peoples' quality of life.

* Good Shepherd claims a write-off rate of only 1%!
* This report also details the social and economic impacts of the scheme, including a reduction in the use of payday lenders.