1966 and All That

Listener 12 May, 1979

Keywords: Macroeconomics & Money;

The terms of trade measure the value of our exports. In the 1950s and the early 1960s they were high, which meant that we were able to buy a lot of imports for each tonne of wool, meat or butterfat. It may well be that for those 18 years we experienced the longest period of high terms of trade in our entire history .As a result New Zealand had one of its most sustained periods of prosperity. Not the least of the achievements were moderate economic growth, low inflation and negligible unemployment.

But from 1966 our terms of trade began to fall; imports became increasingly expensive in terms of the quantity we had to export. In every year except one, our terms of trade were below the average of the prosperous ’50s and ’60s. The exception was 1973, when there was a world commodity boom followed by a world commodity bust. It would be foolish to place too much stress on that exceptional year, and for reasons of brevity we shall ignore it. Basically since 1966 our export prices have fallen 2.5 per cent each year relative to Import prices, and by 1977 they were 27 per cent below the boom average.

Inevitably such a dramatic change affected the internal economy. One of the first areas affected was the profitability of farming (i.e. the return from farm production, excluding capital gains from land). During the boom it had averaged 6.1 per cent a year, but after 1966 it began to decline by 4 percentage points a year, and by 1976 it was down to around 2 per cent.

Profitability is one of the signals a market economy uses to determine what the best avenues of production are. The fall in the farm profitability was a signal that traditional farming was no longer as good a choice as it had been in the past. As a result, farm output, which had been growing 3.5 per cent a year up to 1968, slowed down and indeed has been virtually static (discounting the effects of weather) ever since.

But most of the economy ignored the change in signals. The profitability figures said ‘Find new ways of exporting: reduce domestic industries’ dependence on imports: restructure!’ Instead we pumped subsidies and savings into the old production pattern, with the result that growth of output fell from 4.4 per: cent a year: to 2.4 per: cent. In some years, growth was negligible or negative …

… and unemployment rose. Registered unemployment increased from an average .07 per cent of the workforce up to 1966 to .34 percent in the following decade – a fivefold increase. After 1977 it increased another fivefold.

Meanwhile the price structure, faced with low profitability in traditional activities but continuing pressure from economic management to develop them, solved the conflict by inflating. Consumer price inflation had averaged 2.8 per cent a year up to 1966, but it rose rapidly thereafter, and by the early 1970s had reached ‘double-digit’ levels.

1966 was the end of an economic era for New Zealand. Yet 13 years later too many of us have still failed to notice the break. Our problem has not been a failure of the economy to adapt to the situation. Rather, our social and political rigidity has frustrated the economic adaptation. There is no reason why the trends of the last 13 years should continue, if we can abandon that rigidity. 1979 would be a good year to start.