www.wairaka.net/ubinz/IR/FutureIncome/SChatterjee

Income Inequality in Colour:
Ethnicity and Income-shares in Post-reform New Zealand

Srikanta Chatterjee*

Abstract

The New Zealand economy had experienced slow growth, rising unemployment and inflation, and trade and budgetary deficits over the decade leading up to the 1980s. The thorough reform programme starting in 1984 had the aim of removing some of the obstacles that caused the economy to under-perform. The reform measures were predicated on the ideological belief that the 'free market' was more efficient than 'governmental intervention' in the allocation of scarce resources and distributing the national dividend amongst the population. Accordingly, many of the activities traditionally under the control of the public sector, were either privatised or reformed along free market lines. At the end of the 1990s, however, the economy still remains slow growing, unemployment still higher than in the mid-1980s, external deficit still a major worry. On the other hand, prices are more stable, and the government's budget is, on the face of it, in healthier shape. The question as to who benefited from the reforms naturally arises, and several recent studies have shown that a very small proportion of New Zealanders had. New Zealand has the dubious distinction of achieving one of the fastest increases in inequality in the developed world over the period of the reforms. In this study, we look at one particular aspect of that inequality - its ethnic dimensions. As New Zealand has been evolving as a multi-ethnic, multi-cultural nation in recent decades, it is important that the hopes and aspirations of all its members are taken into account in policy decisions if a harmonious, well-functioning social fabric is to be achieved and maintained. As this study shows, ethnic minorities have fared unevenly in the distributional arrangements. The nature of this unevenness is documented, and the policy implications explored in this study.

* Professor of Economics, Massey University, Palmerston North, New Zealand.
email Address: S.Chatterjee@massey.ac.nz

This is an abridged, largely non-technical, report based on the findings of a wider research project on income inequality in New Zealand being conducted in the Department of Applied and International Economics of Massey University.

1. Introduction

The period from the early 1980s and 1996 - the period of this study - saw New Zealand implement a wide range of economic and social policy reforms. These reforms included, inter alia, the deregulation and/or privatisation of many previously state-controlled activities; freeing-up of the financial market, capital flows and the exchange rate; removal or reduction of trade barriers, reform of the tax system and other fiscal arrangements; fundamental alterations to the laws governing the labour market and industrial relations; granting of formal autonomy to the central bank (the Reserve Bank of New Zealand) and reduction in many social welfare benefit payments as part of an overall policy of reduced government involvement in the economy and society. The ideology underlying these reform agenda was that of the free market which, its protagonists believe, is capable of enhancing economic efficiency by enforcing competition amongst businesses. The primary aim of New Zealand's reform programme, it would be useful to remember, was to shift the policy emphasis from stabilisation and equity - a long-established tradition in New Zealand's public policy-making - and focus economic efficiency, so that the productive capacity of the economy improves, and more wealth is generated.

Naturally enough, the policies have affected the lives and livelihoods of many New Zealanders in major ways. However, who benefited how much from the reform measures is one that has not, as yet, been adequately addressed. A major test of any economic policy measure is how it affects the size of the "national cake", i.e. the nation's real income, and its growth rate. A second, related, test is how it affects the manner in which the "cake" is divided up amongst different groups in society. It is an aspect of this latter issue that this article addresses. It looks at some ethnic dimensions of income distribution in New Zealand, and how it has changed over the period 1981-96.

2. Income Inequality in New Zealand: Some Recent Studies

New Zealanders like to think of their country as one that has avoided the excesses of poverty and inequality that characterise some comparable countries elsewhere in the world. Up until the early 1970s, that belief might have had some validity. But over the last three decades - in particular, over the period since the reforms began in the mid 1980s, inequality in New Zealand has grown steadily and at a rapid rate. Several studies confirm this trend, and investigate the reasons behind the increase. Thus, Podder and Chatterjee (1998) found that the Gini coefficient of income inequality (which assigns a number from 0 to 1 to indicate the degree of inequality in a distribution; a value of zero indicating a given share of the population getting the same share of income, while a value of one indicates that all income goes to the richest group) increased from 0.353 to 0.404, an increase of 14 percent over a span of twelve years from 1983/84 to 1995/96, a very rapid increase by international standards. This study also found that, over the same period, the bottom eight deciles of the population suffered a decline in their relative shares of the total income paid out, the ninth decile's share remained unchanged, while the top decile had its income share rise by around 15 percent.

The top 5 percent experienced an even more spectacular increase of around 25 percent in its share. A Statistics New Zealand study (SNZ 1998) also came out with similar findings.

3. Population Shares and Income Shares of Ethnic Groups

In this article, we go beyond the overall inequality, and look at the situation in respect of the various broad ethnic groups as identified by Statistics New Zealand for the purposes of collecting and reporting the data relevant for our study. SNZ identifies the sample respondents in terms of their ethnic origins as Pakeha (European), Maori, Islanders and Others. In a "perfect-egalitarian" arrangement, each ethnic group would receive the same share of the total income paid out as its share in the total population. Admittedly, that would be an unrealistic expectation, but it would probably be desirable to avoid an "excessive" degree of inequality amongst the different ethnic groups. So, how did the population and the income shares match up?

In all three samples, the income shares of the European population have exceeded its share in the total population, while the income shares of the other three groups have been less than their shares in the total population. Thus, in 1984, Europeans constituted 86 percent of the population; their share in the total income was over 90 percent. The proportion of Maori in the population was 9 percent and their income share was 6 percent; the Islanders 3 and 1.8 percent; and Others 2.1 and 1.8 percent respectively. By 1996, the share of the Europeans in the population was 81 percent, in income 87 percent; for Maori these shares were 9 percent and 7 percent; for the Islanders 5 percent and 2 percent, and for Others 5 and 4 percent respectively.

The income differentials of the ethnic groups can be captured in terms of the average household income per head of each ethnic group as a proportion of the household income per head of the population as a whole. In 1984, this ratio for the Europeans was over 105 percent, for the Maori 67 percent, Islanders 61 percent and Others 85 percent. By 1996, the ratio for the Europeans had risen to over 107 percent; Maori too had experienced a rise in its share to 73 percent, but the shares of both the Islanders and others declined to 50 percent and 78 percent respectively. Thus, after twelve years of economic reform, the income shares of all the minority ethnic groups remained lower, or significantly lower, than both the national average and the average for the European population. These figures are presented in the appendix Table 1, and

Graph 1.

Using data from the Population Censuses, Appendix Tables 2, 3 and 4 report how the different quintiles (20 percent) of the populations of the four ethnic groups featured in the distribution of the incomes their particular group received in 1981, 1991 and 1996. The year 1981 of course was before any major reforms had begun, so it represents the situation as it had evolved under the "old regime" in New Zealand. The figures show that a significantly larger proportion of the Maori and the Islander populations were in the bottom quintiles, and significantly fewer in the top quintiles relative to the European population in 1981. But, relatively fewer of the 'Other' group were in the bottom income quintile. By 1991, about halfway through the reform programme, there were fewer Europeans, in proportionate terms, in the bottom quintile, but significantly more of the Maori and Islanders, and slightly more of the other group featured in the bottom quintile.

By 1996, the proportions of the Maori and the Islanders in the lowest income quintile had declined, but still remained higher than in 1981, significantly so for the Maori. The proportion of the 'Other' group jumped from 22 percent in 1991 to 32 in 1996. While it is not easy to explain this very sharp increase over a relatively short period of five years, it is conjectured that this may have something to do with the increase in the number of immigrants form 'non traditional-source' countries over this period. Many of these migrants were unable to find suitable employment, and their low earnings would have dragged their group down.

Looking at the two top income quintiles over the period, we find that the share of the Europeans has increased from 41 percent in 1991 to 45 by 1991, and stayed unchanged in 1996. The shares of the Maori and the Islanders had declined from 26 and 25 percent respectively in 1981 to 21 and 18 by 1991, and rose to 22 percent for each group by 1996. The situation for the 'Other' group is, again, noteworthy: their proportion in the top group, at 21 percent, was the same as that of the Europeans in 1981, and in the next highest group slightly higher than the Europeans in the same year. There was a slight fall of the two top 'Other' group income recipients - from 42 percent to 40 - by 1991; while the share of the same two groups of the European population had increased from 41 to 45 percent, as noted above. But, by 1996, the share of these two groups fell dramatically to 29 percent for the 'Other' group, while their share in the bottom three quintiles increased from 58 to 71 percent. Once again, the reason for this sudden increase in the proportion of low-income recipients amongst this particular group may be related to the increase in the number of these people in that period, and the lack of employment opportunities many of them faced.

4. Causes and Pointers towards Alleviation

The reasons for the increased inequality in New Zealand's income distribution are many and varied. For a detailed discussion of the factors and forces that had contributed to the observed increase, the reader is referred to Podder and Chatterjee (1998). In short, the sharp increase in unemployment in general over the reform period, the reduction in the number of people employed in the primary-processing industries, the decline in the rural economies as a consequence of trade and exchange rate policies, and the reform of the social welfare benefit regime involving reductions in most benefit payments all contributed to the increased inequality. The changes to the tax system that saw direct personal taxes reduced and a universal indirect tax, the goods and services tax, introduced would also have helped to increase inequality. However, in this article, we have reported the changes in the distribution of gross incomes only; so the effects of the tax changes therefore do not feature in our findings.

So, what could be done to minimise the observed inequalities? Again, it is not an easy task to offer ready solutions to a complex problem such as increased income inequality in a society. In the interest of brevity, a few policy pointers are put together, without detailed elaboration, below. The reader is invited to examine the points critically and assess how feasible they might be in contemporary New Zealand.

4a. The Policy Perspectives

· Reparative justice versus Distributive justice for Maori.

· Increased opportunities for labour force participation for all groups, especially for Maori and Pacific Islanders amongst whom the incidence of unemployment is much higher than in the population as a whole.

· Diversification of occupational choice for non-Europeans from agricultural and production workers to more skilled regular workers.

· Improved incentive structures to attract and retain younger Maori and Islanders in post-compulsory education and job-training.

· Targeting the ethnic groups other than Maori and Islanders with specialist help to enable them to use skills and qualifications more productively.

The emphasis of the policy measures suggested above is on the generation of productive employment as that is an effective way to raise the levels of income of those who are either unemployed, and therefore low-income, or are not fully employed, and therefore dependent on welfare benefits. Better training and educational opportunities can enable those who take advantage of it to raise their potential incomes. When that happens, extremes of both poverty and inequality are expected to decline. But, as is argued below, redistributive policies have a more immediate and favourable impact on inequality, and possibly, poverty too. So, policies to improve employment opportunities should supplement, rather than supplant, the redistributive policies.

For the Maori population, reparative justice embodied in the settlement of the Treaty of Waitangi claims may provide the means, if only a limited one, to increase employment opportunities in some geographic regions hardest hit by the reform programme of the last sixteen years. If the compensations received are invested in activities that attract the unemployed Maori, and help them develop a useful, marketable, skill, the generation and the distribution of incomes can both benefit. But this may take time. Meanwhile, active, targeted, programmes of distributive justice can add effectively to the benefits conferred by the measures deriving from reparative justice.

Improved opportunities for education and training, particularly on-the-job training, improved incentive structure to attract and retain young people from all minority ethnic groups in post-compulsory education, assistance with self-employment in suitable areas of activity, and assistance in matching skills to jobs could all be part of a coordinated programme of actions to develop skills and generate employment. The central and local governments and the private sector all have a role to play, and the more coordinated the approach the more successful it is likely to be.

For the more recently-arrived (mainly Asian) migrants, the major barrier to gainful employment has often been the non-acceptance of their academic and/or professional qualifications by New Zealand employers and/or professional bodies. Opportunities for retraining, and reassessment of their skills can help many of them gain recognition, and employment - in some cases in areas of critical skill-shortage.

It is sometimes argued that faster economic growth can take care of the problems of poverty and inequality by increasing the size of the " national cake". Even if there is some substance in this argument, tolerance of ever-increasing inequality or of increased poverty, particularly amid relative societal affluence, cannot be the mark of a fair society. Providing a minimum of economic security to its members may be considered to be one of the most basic features of a successful social arrangement. If targeted public support is needed to achieve that ahead of adequate economic growth, the national cake may need to be sliced somewhat thinner for some members of society. But there are bound to be other dividends - both pecuniary and non-pecuniary - that a more equitable social order can offer everybody.

This point has been argued eloquently by the 1998 economics Nobel laureate Amartya Sen and his co-author Jean Dreze in their acclaimed book of advocacy Hunger and Public Action. Using a case study method, these authors have provided examples from a large number of countries, at different levels of affluence, to demonstrate that redistributive policies have contributed in significant ways to the alleviation of hunger and malnutrition, and in promoting health and basic education in many countries where waiting for economic growth to deliver comparable benefits might have taken much longer, and cost more in human terms. Formulating policies that accept minimising excessive inequality and human misery as desirable goals in themselves requires, first and foremost, a political and moral commitment, and only then, the economic wherewithal.

References and Selected Additional Readings

Barker, G. (1996), Income Distribution in New Zealand, Institute of Policy Studies,

Victoria University of Wellington, New Zealand.

Bolger, J.B., R. Richardson and W. F. Birch (1990), Economic and Social Initiatives,

Statement to the House of Representatives, Wellington, New Zealand.

Creedy, J. (1997), Statistics and Dynamics of Income Distribution in New Zealand,

Institute of Policy Studies, Victoria University of Wellington, New Zealand.

Dixon, S. (1996), "The Distribution of Earnings in New Zealand 1984-94". Labour

Market Bulletin, 1996:1, 45-100.

Dreze, J. and A. Sen (1989), Hunger and Public Action. Oxford: Clarendon Press.

Easton, B. (1996), "Income Distribution", in Silverstone, B., A. Bollard and

R. Lattimore (eds.), A Study of Economic Reform: The Case of New Zealand.

Amsterdam: North-Holland.

Podder, N. and S. Chatterjee (1998), "Sharing the National Cake in Post Reform New

Zealand: Income Inequality Trends in terms of Income Shares", Monograph

Published by the Social Policy Research Centre, Massey University,

Palmerston North, New Zealand.

Statistics New Zealand (1999), New Zealand Now: Incomes, Wellington Government

Press.

APPENDIX

Table 1: Income Differentials of Ethnic Groups

Year	European	Maori	Islanders	Others
1984	105.17	66.72	61.11	84.57
1992	107.81	64.05	56.21	90.31
1996	107.13	72.61	50.02	77.79

Notes: The figures are percentages of the national average = 100.

Graph 1: Income Differentials of Ethnic Groups (in %)

Table 2: Distribution of Household Incomes Across

Ethnic Groups in 1981

(% of population)

	Bottom	Fourth	Third	Second	Top
Euporean	19	19	20	20	21
Maori	30	24	19	16	10
Pacific Island	29	27	19	19	6
Other	21	20	18	21	21

Table 3: Distribution of Household Incomes Across

Ethnic Groups in 1991

(% of population)

	Bottom	Fourth	Third	Second	Top
Euporean	15	19	20	21	24
Maori	42	19	17	13	8
Pacific Island	39	24	19	12	6
Other	22	19	19	19	21

Table 4: Distribution of Household Incomes Across

Ethnic Groups in 1996

(% of population)

	Bottom	Fourth	Third	Second	Top
Euporean	15	19	21	22	23
Maori	39	22	17	14	8
Pacific Island	32	25	21	15	7
Other	32	23	16	14	15