RISK AND THE INSTITUTIONS OF GOVERNMENT.

• Author: Brosnan, David
• Position: Review

The concepts of risk and risk management have a long intellectual history. Probably most people are familiar with the investment relationship between risk and financial return, with adopting a portfolio approach to spreading risk in investment, and with the notion that people have different risk tolerances (which may change over time). Economists distinguish between individual business, industry and market risk. As noted by one of the contributors of this book, "business is risky, causing profits and shareholder return to fluctuate". The point of risk management in the commercial sector is to minimise the variability of return on capital -- i.e. to increase the certainty of profit. The stated objective of the editors of this book is, "to look at how the state sector in New Zealand handles change and uncertainty". The methodological approach is, in effect, case studies of particular public sector initiatives over the last two decades -- ranging over the early 1980s' "think big" initiatives, privatisation of the Bank of New Zealand after the need for government capital injections, and the Cave Creek tragedy.

The list of contributors to this book is impressive. Graham Scott (previously Secretary to the Treasury) provides an informed view of the "think big" economic development programme of the 1970s and 1980s, and insight into the more recent issues associated with health sector reform. He also makes a useful distinction between policy and operational risk -- between doing the right thing and doing it well. Peter Clough of the New Zealand Institute of Economic Research provides a chapter drawing out the implications of uncertainty, using environmental issues as examples.

The Hon David Caygill contributes a political perspective on public policy issues, including a potted history of some of the major risk issues the Labour administration faced in the second half of the 1980s. The Caygill chapter adds to the distinction noted above of the difference between policy and operational risk by adding the risks that flow from failure to make decisions. While poor policy decisions or implementation are generally subject to second thought and are often reversible, failure to make decisions in time can have more serious effects.

The contribution from Arthur Grimes looks at risk and the banking sector, with a focus on the most desirable approach to central bank prudential supervision of the banking industry. Ian Duncan provides a useful, if brief, history...