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The paper provides comparative data about New Zealand's current level of market and policy integration with the rest of the world. Market integration occurs when two or more economies function as a single market. It is likely to be evidenced by high flows of goods, services, capital and labour and convergence of prices. Policy openness and integration are means governments might use to encourage, impede or direct market integration. Indicators include lack of barriers to cross border flows and similarity or compatibility of policy settings between countries. The paper concludes that New Zealand has a relatively high level of integration with the global economy. The widespread perception, however, that New Zealand is a great deal more open and integrated than the rest of the world is not supported. We are broadly similar to other advanced economies in both openness of policies and integration of markets, and significantly less integrated than other small economies. New Zealand started opening comparatively recently. The perception that we are 'leading the bunch' may have arisen due to the rapid liberalisation required to catch up with other advanced economies and overcome the burden of distance.

Markets are becoming more integrated. Whilst governments have limited influence over this process, they can hasten or hinder the pace of integration and will need to respond to the implications of integration. This paper provides a framework for thinking about the benefits and costs of market integration. It analyses how cross border flows of goods, services, capital and labour affect the living standards of New Zealanders in terms of both productivity and incomes as well as other, broader, aspects of living standards. Particular attention is paid to the areas of spatial economic analysis and national sovereignty and identity. Governments must consider a number of factors when thinking about their stance on integration. Further economic integration promises economic benefits for New Zealanders in terms of greater productivity and higher incomes. One risk, however, is that with increasingly free factor flows, government pursuit of integration may increase the risk of activity relocating offshore. The evidence on the overall effect of integration on income distribution is unclear, however we do know that there will be winners and losers. Decision-making power and feelings of identity seem to be important components of well-being - integration brings with it both risks and opportunities in these areas, as pressure is put on traditional forms of governance and identity, and new forms develop. Deciding how the costs and benefits of integration stack up ultimately involves a number of value judgements - the paper provides a framework and a summary of empirical evidence to help inform those judgements.

Many past and potential New Zealand reforms involve significant devolution, i.e. the transfer of authority to make decisions on behalf of society from a higher to a lower level of government. In particular the Resource Management Act (RMA), the health and education reforms, and decisions about the institutions for addressing Maori issues have led to significant devolution of authority. Employment policy and social welfare are areas where devolution is an important policy option. The role and function of local government also is inherently an issue of the appropriate level of devolution. Many of these reforms have now been in place for a number of years, so it is appropriate to review our experience of devolution, identify the successes, and attempt to address the problems that have arisen. Two papers address issues of when and how we should devolve authority from central to local government. This paper looks at devolution both from a general theoretical standpoint and from the perspective of the New Zealand Resource Management Act 1991 (RMA), with residential land use as an illustration. Although the RMA is discussed throughout both papers, the framework developed applies to any area of policy for which devolution decisions are being considered. The second paper, Treasury Working Paper 98/7a, applies the framework to the optimal pattern of devolution for policies relating to kiwi protection.

Policy interventions that affect or are mediated through the family typically assume a behavioural response. Policy analyses proceeding from different disciplinary bases may come to quite different conclusions about the effects of policies on families, depending how individuals within families behave. This paper identifies the implications of five theories of family and individual behaviour for the likely success of policy intervention. Anthropology documents not only the universality of the family, but also its many forms. Economic theory illustrates the capacity for well-intentioned policy to be thwarted by individual rationality. Evolutionary biology suggests that a number of fundamental drivers of behaviour are genetic predispositions and can be difficult to influence through policy. Sociology emphasises the role of social norms but recognises that individualism limits the influence of society generally on individual behaviour. Understanding the theories of the family emanating from different disciplines can enrich policy analysis by identifying how and why behaviour can be influenced. It also can serve to remind researchers of the resilience of the family and the limits of government intervention.

There has recently been a rapid growth in international literature and research on the links between economic growth and social capability and their impact upon well-being. This paper draws on that literature to build upon previous Treasury work at the intersection of economic and social policy. It examines the relationship between a productive economy and a society that enjoys high levels of participation, connection and cohesion, and their combined impact of peoples' well-being. It suggests that the objective in an inclusive economy is to improve the well-being of New Zealanders by directing policy to ensure that there are broad based opportunities to participate in society and the economy. The paper notes the 'virtuous' and 'vicious' circles that can occur when positive or negative interrelationships arise as a result of the above links. It suggests that there are five broad policy themes that are particularly important for building a more inclusive New Zealand economy. In particular there are a small number of policy areas where there appear to be opportunities for gains in equity and participation while being neutral or even positive for growth. These opportunities lie in focusing on education and jobs in the lower part of the distribution of attainment and skills; on strengthening Maori institutions and governance; and improving understanding of and reporting of the results of government action. Three Treasury companion papers to this one expand on particular aspects of the inclusive economy. They are Reducing Disparities in an Inclusive Economy (forthcoming), Human Capital and the Inclusive Economy and Geography and the Inclusive Economy: A Regional Perspective.