New Zealand: an Economic History to be Proud of.

Keith Rankin, 16 July 1998

 

I have what might be called a revisionist view of New Zealand's economic history. It is a much more positive - indeed assertive - view from the more common view that New Zealand has always been "dependent" (as in Colin Simkin's 1951 book The Instability of a Dependent Economy) and like "a rowing boat in stormy seas" (see Brian Easton, NZ Listener, July 4).

As such, I really loved James Belich's 1996 book Making Peoples, and I look forward very much to its sequel. Here was our story, without cringe or apology. We - Maori and pakeha - have much to be proud of. And we were never boring.

My view also fits in with Colin White's revision of Australian economic history as expressed in an essay "Mastering Risk: The Story of Australian Economic Success" in Shutdown (1992), and more fully in his 1992 book Mastering Risk; Environment, Markets and Politics in Australian Economic History, which includes New Zealand in passing and would have had much more to say about New Zealand had there been fewer editorial constraints. (Shutdown in a set of anti- "economic rationalism" texts. Negative historical self-images play into the hands of right wing ideologues who are always on the lookout for a problem - any problem, real or imagined - to which their solutions may be applied.)

Some feel for the story I hope to publish one day comes out in "Recession and Depression in Context", which was published in the NZ Herald on 1 July 1998 as "What Depression; we've been in worse shape often enough".

The following edited transcript of an email dialogue with a friend, following the publication of the article, tells a little more of that story. It is not a conversation. Rather, I have annotated some of my friend's comments, and he "later" commented on my annotations:

 

I have read "Recession and Depression in Context" through. You make some interesting and valid points. Of course, in such a short article you lay yourself open to much potential criticism

KR: You know that I welcome criticism. By my being provocative, those with different views may, hopefully, be seduced into dialogue.

for selective analysis. For example, your Table 1 shows a surge in import volumes in the late 80s but a complete turn around after 90/91. This hides a variety of causes

KR: Of course. Nevertheless, there is a clear turning point in the relationship between imports and exports. It is the 1985-89 period that is anomalous - an import-led recession - and did indeed create the basis of the 1990s' balance of payments problem. In fact, the increased imports were funded in part through an improvement in NZ's terms of trade. Most of the funding came from "over-hyped" [1] capital imports, though. [And they arose from our playing the "let's have higher interest rates than everyone else" game.

such as a change in the quality of imports, changes in the direction of trade, changes to tariff protection both in NZ and elsewhere and the start of the asset sales. If I recall correctly this was also a time of very high nominal interest rates and growing unemployment. If so, why was a) the level of imports high and growing? and b) the shift to land ownership so marked in spite of the 87 crash?

KR: High interest rates generate the capital inflows that fund the excess imports. And high interest rates deter business lending much more than they deter property lending, which is secured and is subject to capital gain. So, whenever we have high interest rates, heaps of money goes into the metropolitan property market. When you say "land ownership", I take it that you mean, in the main, urban land?

If I recall also, wasn't there a lifting on the prohibition of local bodies borrowing offshore? There seemed to be a marked shift from Govt owned debt to privately owned debt (implicitly underwritten by Govt). Or have I got it wrong?

KR Much of the capital inflow c. 1989 was the sale of public assets such as Telecom. That capital inflow [which represented a new private liability to replace an old public debt] certainly funded many imports (in 1989 it was an explosion in used cars).

Table 2 [KR: not published in the Herald version] I admire. You may face some criticism on the base dates though. I can accept the 29 and 89 starting points but 1975 may be less easy.

KR: 1975 was important, because Brash, in his Friday speech, said that we are moving to our biggest crisis since that of the oil shocks. He meant, in particular, the 1974 oil shock. While some growth continued until the end of 1976, the annual data supports my choice of dates, and the resonances associated with the late 1970s are strong enough that I don't have to explain my choice of dates. (After all, its only a 1000 word op-ed article.)

The period from 1967 through to about 1981 was exceptionally turbulent for NZ; perhaps more so than any other time this century. There were at least four major external shocks plus the Think Big Projects during this time. (67, 72, 73, 75, 78?) It takes a brave person to defend any year as a "normal" year in this period. In some ways that may increase the value of Muldoon's contribution (except for the Think Big).

KR: Why 72,73 and 75 but not 74? And I don't buy the argument that Think Big was a mistake, although I think that the Clutha project should have been two low dams. I think that every year was turbulent in its own way, including those before 1967 and after 1981. I cannot find any claim in my article that any year was normal.

"All of the recoveries have revealed a resilience in New Zealanders' response to crisis" seems to me to pay scant regard to the overwhelming influence of external circumstances.

KR: I actually think that "external circumstances" have been overplayed for a century or more. My reading of NZ history suggests that we have been a pretty self-reliant lot, and the so-called dependency link between Britain and us was a bit of an illusion; ie it reflects a rational choice that we made and not a choice imposed on us. I think the whole "stormy seas" argument has been overplayed. And I think that when we have been in deep trouble it has invariably been self inflicted. Did you know that NZ's growth has been countercyclical with the OECD for most of the time since 1974?

We have the ability to make an adverse shock worse but not much ability in the short term to ameliorate an adverse shock. The "good times", on the other hand, seem to creep on us so slowly that we are only aware of them when they have gone! Here again we can attenuate a boom but not "lock-in" long term advantages (if any).

 

later

 

I don't think there is any argument that the 85-89 trade deficit was self-inflicted. Even so, I applauded at the time the decision to remove import licensing and nothing since has persuaded me that it should be reinstated (Sutch notwithstanding).

KR: It was Muldoon who initiated the phasing out of import licences. Douglas simply accelerated the process. Actually, many of the liberalisation initiatives came from Muldoon: freezing works, transport, labour, CER [Closer Economic Relations with Australia], film industry, plus "restructuring" studies re the car and textile industries. I actually watched the car workers march down Lambton Quay in 1980.

The timing and ranking of liberalisation events through the 80s remains a contentious issue as well (although well outside the scope of the article) In essence there seemed to be Muldoon's line : we need to cushion the impact of adverse shocks versus Douglas' line : it's the cushioning itself that aggravates the impact of adverse shocks. Which was "correct" depends on the nature of the unknown future shock.

KR: I don't think that Douglas was particularly interested in adverse shocks. He swallowed Bob Jones line that a floated exchange rate would be a full and comprehensive cushion from external events, thereby enabling him to focus entirely on domestic policy.

In Muldoon's favour, the history of NZ terms of trade had been fairly steadily cyclic (ignoring the Depression and the Wars) up to the first Oil Crisis. Without the relevant figures, my memory dredges up a 40% adverse change in terms of trade in the 72/73 period

KR: The 40% terms of trade shock in 1972/73 was in our favour. As a result the $NZ was revalued. It was still set at $NZ1.6 to 1 pound sterling in 1974. The oil shocks were themselves over-hyped. The first oil shock was that of 1974. There was a short world recession in 1974-75, that resulted not from the rise in oil prices but from some of the kneejerk political responses. Recovery in America was well under way by 1976, by 1977 in Britain. There was a major boost to new technology, especially energy conservation technology. [The oil shock favoured new innovating firms over established multinationals.] (The worst oil shock was the third one - in 1986 - where real oil prices returned to their 1972 levels, thereby making us complacent once again about our oil use.)

followed by the second oil shock in 74/75.

KR: The second oil shock was in 1979. It followed the Iranian revolution? Do you remember carless days? The recession that followed was much greater because the monetarists were now really entrenched in the G7 world's Treasuries (except Japan). The "crisis" was their opportunity. (You may want to check out the following item on the Internet; a partial transcription of a BBC documentary about Thatcher's monetarism: Monetarism & Keynesianism: Fables from the Age of Science? .)

Muldoon and National had used the accepted counter-cyclic deficit spending to offset these shocks (actually Rowling first in 73) and been caught out.

KR: Gross Fixed Capital Investment was well down in 1978/79. Think Big was perfectly timed to restore investment levels, and, I would argue, that it was a great success in Keynesian terms. Furthermore, Think Big saved the 4th Labour Government in two ways. Their anti-Think Big rhetoric was never contested because no-one wanted to be seen saying nice things about Muldoon's policies. More importantly, Think Big had a big positive impact on our exports, and saved large quantities of commodity imports. The balance of payments problem in the late 1980s would have been much more significant if we had not had the benefits to our external accounts arising from Think Big. The impact of public sector overseas borrowing in Muldoon's time was minuscule compared to the impact of high interest short term capital imports in Douglas's time.

How would the economy today react to such an extreme set of circumstances I wonder?

KR: Probably like Rhodesia's at the time of the sanctions in the late 1960s: several years of 7% growth. [2]

1985-89 I am less familiar with. [But] I clearly remember the sense of relief and renewed enthusiasm after the 84 election followed by a growing unease with Roger Douglas' policies.

KR: I wrote a letter to the Dominion, published I think on 29 July 1984, suggesting that we were in for a bout of Thatcherism. Having followed the rise of Mrs Thatcher while I was in England in the late 1970s, that conclusion was obvious to me but clearly less obvious to most other New Zealanders.

At the time I was employed as the assistant Contract Manager for one of the large construction companies building the steel mill expansion at Glenbrook. Even then I thought the Think Big projects were disastrous. Certainly the Motonui Gas to Methanol Project was a success both in terms of the construction and the flow on effects. But the others were ill judged. I remember Bill Birch forecasting 1000s of new jobs and lowered input prices.

KR: The 410,000 jobs were conditional projections; they were not promised outcomes.

Marsden B was built for who knows how many million but immediately mothballed, never used and is now dismantled.

KR: It would be interesting to see the arguments at the time for Marsden B. I understand that Treasury supported it.

Glenbrook was built for an unpublicised cost (but my estimate of $2500 million I believe is not far away) sold illegally for a song and further huge costs in litigation and has now drifted into the ownership of BHP, the company Glenbrook's expansion was authorised to compete with.

KR: My understanding is that it was Roger Douglas who completely stuffed up Glenbrook. I read an article about the original proposal and financing of it sometime in the 1980s. There were some very corrupt dealings going on; it would make a good Ian Wishart story. Actually, Glenbrook contributed significantly to our exports in the early 1990s. [Their own literature said that they had to divert product onto the world market, as, in 1991-92, the domestic market for steel was very weak.]

The Clutha Dam story has not (and probably never will be) told in its entirety.

KR: It was though entirely linked to the desire to export more electricity in the form of Aluminium smelted at Aramoana. I opposed the smelter on environmental grounds, and have no regrets about that. But the success of Tiwai Point [the 4th potline was a Think Big success] did suggest that a replica, buying electricity at a higher price than the Comalco arrangement with Manapouri-generated power, would be a viable solution to help fill the huge balance of payments hole we found ourselves in after the collapse of the terms of trade in 1974-75. [We did have a comparative advantage in electricity production, and aluminium is the best means to export electricity.]

Inter alia, my understanding is that, apart from political considerations such as the strength of the rural lobby and the Electricity Department, the decision to go ahead was a decision to take on the Boilermakers Union which had successfully disrupted the Wellington BNZ building, the Mangere Bridge project and the Steel Mill expansion. By opening up new work in the deep south the union became fragmented and lost much of its power.

KR: I guess that "taking on the unions" was seen by Muldoon as a sine qua non of successful liberalisation. Likewise, the wage-price freeze was an attempt to secure his micro reforms from the ravages of world inflation and the Labour Party. There was a political problem that concern about inflation might lead to a shift to antiliberal policies in 1984, given that even Muldoon realised that he couldn't lose three elections in a row and still stay in power. (He lost the 1978 and 1981 elections on popular vote.) Labour's rhetoric in 1983 and early 1984 was antiliberal. (The debate about voluntary unionism in early-1984 became quite hysterical, with John Kirk's "na-na-na-na-na" vote winning it for Muldoon. I think that Mike Minogue supported Labour. The atmosphere surrounding the debate was probably responsible for the attempt on union leader Pat Kelly's life [caretaker Ernie Abbott died instead].)

You are quite correct that every year is in some way anomalous, nor did you claim any year to be "normal". What I was trying to say is that whenever you set a base year for comparison over time, the base year can become critical.

KR: Of course. But I trust my judgement. Also, it may be appropriate to use different years in different contexts. When seeking a counterexample, it is legitimate to make a choice of years to suit one's case. The cycle in the late 1980s was so bad for us because of Rogernomics (it was actually counter to a rising cycle in the rest of the world).

As you know better than I, growth may seem to be spectacular if the base year is chosen from the end of a recession but not if chosen before or after. Now it seems to me that the choice of base year in the mid 70s period is unusually problematic and can fairly radically alter the analysis. If you are satisfied with 1975 for other reasons - excellent.

KR: Again, my hand was tied by a need to link to the "oil shock", which has been set up in our mythology as the last really big crisis. Don Brash, in his Friday (26 June) speech, said that we were entering our worst crisis since that of the 1970s following the oil shocks.

I am somewhat surprised to hear you dismiss the effects of external circumstances.

KR: I don't dismiss the such effects. But, on many occasions, external events had counterintuitive effects on us.

Of course the decision to trade nearly exclusively with Britain for most of this century and last was a set of rational choices. But that set of choices were constrained by institutional factors; the early investment was overwhelmingly British,

KR: So? In the 1980s we bought most of our oil from Iran, because of an implicit bilateral relationship. Yet we still bought it on the world market. Similarly, our trade with Britain fully reflected the nature of the world market. Thus Britain joining the EC was no disaster. We simply continued selling our meat and butter on the world market. The EC changed the point-to-point flows; that's all.

Britain was the premier freetrading nation up to the Depression era, the major industries up to the 50s-60s such as the meatworks and shipping were British owned, Australia, a logical trading partner, only in manufactures and services such as tourism was seen to be in competition, we derived our legal and institutional framework from Britain so that trade was easier with Britain than say with Asia or Europe, the US was isolationist and had a large and powerful farming lobby (still has).

KR: Everyone liked to trade with Britain, including all our competitors. Denmark, Argentina, South Africa, Uruguay were all a part of Britain's economic or informal empire.

That is not to say that we can sit back and blame our troubles on the rest of the world - we are more than capable of creating our own set of difficulties as you point out. But being a small open economy our efforts can be easily swamped by external circumstances.

KR: Only if we let them. Clearly changing world market forces encourage us to change, at the margin, what we produce, how much and who for. But that's normal. The bigger danger is the stasis implicit in the International Division of Labour views which consigned NZ to be forever a distant offshore farm of Britain. I am a great fan of the James Belich's approach to NZ history. (My ideas were, of course, well on this path before I read his book. He has just reinforced them.) NZ history is exciting and proactive.

Interestingly I heard Bill Birch on the radio the other day talking about the necessity of encouraging industry and business growth as a way of providing increased employment. Sutch was saying the same thing in the early 60s and Import Licensing was his preferred method. I wonder what Birch has in mind.

KR: I would like to read Sutch's arguments for import licensing. I believe that they had something to do with our relationship with Britain; ie with imperial preference. But I also understand that reliance on tariffs was opposed because they were seen as inflationary. Inflation was a huge political bogey in the 1950s.

Regards

KR: I hope I don't sound too dogmatic in my interpretation of NZ economic history !!

 

later

 

I'm sure Sutch argued that the shift away from primary production and the increase in mechanisation meant manufacturing was the most likely route to employment generation. He then argued that if manufacturing was processing imported raw materials, there would be a trade deficit so he advocated the principle of "Manufacturing in Depth". Import licensing was to be a form of infant industry protection and I think was not intended to remain. But bearing in mind the level of tariff protection existing at the time and the large profits generated by protection it is not surprising opposition succeeded in retaining licensing.

KR: Yes, Bill Sutch was very much an "anti-physiocrat", in the tradition of Jacques Necker, Alexander Hamilton and Friedrich List.

I would question the notion that "protection generates large profits", but I do agree that import licensing creates economic rents.

It is worth noticing that protection was a part of New Zealand's post-war social contract. Very high rates of income tax by today's standards - esp. high corporate tax - served as a kind of quid pro quo of which protection was a necessary part. That is the way we funded our social investment; full employment and rates of "production tax" that would have rendered our industries uncompetitive in global markets.

There was never anything inherently uncompetitive about NZ manufacturing; just a learning curve and high corporate tax.

I hope you get a chance to do more work on Sutch.

 

=======================

 

Notes:

1. Professor Andrew Mack, of the New Zealand Asia Institute at the University of Auckland, presents a general analysis ("Financial Markets Lacking Rationality"; NZ Herald, 16 July) of how financial over-hyping has affected many countries at different instances, with Asia being the latest victim of past overhype. Mack is mistaken though in seeing "competitive devaluation" (as China may do) as "threatening a downward spiral into a 1930s'-style depression". Competitive devaluations are a 'zero-sum game', whereas competitive 'deflations' (eg public expenditure cuts or interest rate hikes), competitive wage-cutting and/or competitive cutting of corporate tax are all 'negative-sum games'. It takes a negative sum game, in which everyone loses if everyone plays, to generate a world depression. It is possible for every country to simultaneously have dangerously low wages or taxes. But it is not possible for every country simultaneously to have an under-valued exchange rate. [back]

2. When you cannot import some things, you have to make them yourself. Use of underutilised resources in the domestic economy to replace imports means higher GDP growth. Even an economy in full employment has some slack, as the world's history of warfare shows. In normal times, many economic resources are used by some groups and individuals to pass costs onto others, to the detriment of the national economy; eg consider the activities of company lawyers and accountants. A national emergency tends to release this resource. [back]

 


© 1998


Rankin File | 1998 titles