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.

Wednesday, 14 August 2013

Off of site, out of mind

By Carl Romanos, Stanford Energy and Environment Policy Analysis Center Fellowship Intern, Motu Economic and Public Policy Research

A recent news article says that off-site course-based learning has been an ineffective way to approach staff training for Kiwi small businesses. While this approach may generate some human capital, it requires much employer follow-up in order to relate some of these generic courses to the unique needs of a small business. And by unique needs, I am referring to the jack-of-all-trades mentality that many employees at smaller firms must take. Without the specialized departments you see in bigger firms, employees at smaller firms be versatile and take a generalist approach. 

Regardless of firm size, staff development is a key part of maximizing both profits and productivity. The cost of a generic course may be low, but the actual returns to productivity can be limited when the learning does not directly translate to the firm’s workflow. While larger-scale corporations may see benefits from this off-site approach, smaller firms should consider other methods of training their employees. A more hands-on approach to staff training by supervisors in the firm would be more ideal. A caveat is that supervisors in these small firms may have less spare time or may not have enough expertise in order to effectively train their employees in meaningful ways onsite.

Staff development is definitely a key part of small businesses because it helps promote a culture of loyalty in the staff. Investing in employees, especially younger ones can help reduce turnover. At the same time, business owners are motivated to ensure that employees gain firm-specific human capital that cannot be easily transferred to another job, in an effort to minimize the employees taking their increased skill set elsewhere. A more involved on-site approach to dealing with staff training could promote loyalty and tight bonds within the firm and also increase productivity by increasing firm-specific human capital at the same time.

My solution would be for the "boarding school" mentality to be reversed- perhaps it is the bosses themselves that need to be more proactive in the developmental area. I argue that these bosses should take the time to look into problem areas in their business and find quality courses that teach the skills that can help cover those gaps. By investing time and money in being able to train their staffs effectively and efficiently, they will see the benefits of constant on-site staff development as well as a reduced loss when highly trained employees jump ship.

Friday, 9 August 2013

(Dam)aged Care?

By Sean Hyland, Research Anlayst, Motu Economic and Public Policy Research

The quality of aged care in New Zealand is again in focus after the sad story of a Wellington retiree last week. That case (whilst not isolated) leads me to wonder how the Government weighs the quality of aged care relative to the binary existence of such facilities. When faced with trade-offs over the public purse are we blindly favouring low-cost providers?

Recent deregulation in the industry has promoted cost-cutting. A 2012 joint NZNO-FSWU submission to the Health Select Committee describes a disintegration of staffing regulatory standards, which began when minimum staffing requirements were ignored in the Health and Disabilities (Safety) Act 2001. Unsurprisingly, profit maximising firms have adjusted the composition of skills employed away from best practice standards, which compromises the care of residents.* 

Industry traits (left unchecked) further reduce the business case for higher quality care. It is currently difficult to differentiate facilities by the quality of care provided before Grandma enters, whilst significant exit costs and deteriorating health reduces the ability to move her between facilities. As a result, profit-maximising firms will act to reduce costs. A publicly available national framework for comparing the dimensions of care (note, not outcomes) across providers could alleviate this risk, whilst the extent to which exit costs are anti-competitive is an empirical question.

Ironically, cost-cutting can actually lead to taxpayers paying twice for services. The Government currently subsidises private residential and hospital level aged care; however, the public health system has to step in when things go wrong. As a result, preventable public hospital admissions can arise. Is it  time to attach ambitious goals to funding?

Whilst I cannot comment on Government objectives, I would suggest the current regulatory framework encourages little more than the existence of aged care providers; better regulatory standards are required if we truly care about the quality of our aged care.

*In a response to the recent story the NZNO describes a case where one nurse was responsible for more than 200 residents and patients!