by Brian Easton and Rolf Gerritsen
The Great Experiment edited by F. Castles, R. Gerritsen & J. Vowles (AUP:1996), p.22-47.
Keywords: Governance; Political Economy & History;
Introduction
The Labour governments of the 1980s were the first in Australasia to be forced to come to grips with the increased ‘globalisation’ of their economies-that is, the effect upon them of growing international integration of both capital and goods and services markets. This globalisation, it has been argued (cf. Kurzer 1991; Lee & McKenzie 1989; Notermans 1993), has exerted an inexorable pressure for a convergence towards economic policy-making that removes barriers to free-market mechanisms. Globalisation and greater international competition-as the 1970s oil shocks ended the post-war long boom-supposedly made traditional social democratic economic policy difficult if not impossible (Scharpf 1991). Redistributive, interventionist and expansionary strategies could no longer be employed without supposedly fatally undermining aggregate macroeconomic performance.
This chapter seeks to compare and contrast the economic policies of Australian and New Zealand Labour governments as they operated within the constraints of this increasing world economic integration. While conceding the importance of the global factors influencing both economies, it concludes that the differences between these Labour governments’ economic policies were ultimately more significant than their similarities. Indeed, as time went on the divergence between their two policy sets became sufficiently great to affect adversely even areas where the two Countries desired to cooperate, such as the Closer Economic Relations agreement (Eichbaum & Gerritsen 1993).
The public perception is that economic reforms were among the most dramatic changes made by the Australasian Labour governments of the 1980s. That is likely also to be the view of future historians. This chapter on these economic policy changes is thus a key chapter in this book. Its theme can be summarised in five propositions:
1. Changing economic circumstances
By the late 1970s the Australasian economies were ceasing to manifest the structural characteristics of British settler colonies they had exhibited until well after the war. The most marked transformations were in the external sector, while the domestic economy was laggard, continuing in modified form the past neo-colonial status. This tension generated strong pressures for the internationalisation of more (or all) of the domestic economy.
2. The advent of ‘more-market’ approaches
The election of the Australasian Labour parties in the early 1980s introduced governments committed to reforming the economic mechanisms in a market-oriented direction. They usually chose ‘more-market’ mechanisms, which involved economic liberalisation rather than planning mechanisms (in Australia there was some sectoral industrial planning–cf. Gerritsen & Singleton 1991; Bell 1993, pp. 137-43), for a combination of three reasons: in response to a changing international economic policy agenda; because the circumstances required greater flexibility; and partly b~cause of the demands of internationalisation.
The response to these internationalist demands-for example, in Australia the dramatic ‘float’ of the dollar and deregulation of the financial sector, and then, after the 1986 ‘banana republic’ scare, fiscal rectitude-has coloured popular perceptions of the Australasian Labour governments. As will be seen below and in other chapters in this volume, the reality of Labour governance was more complex than popular judgments allow.
3. Australian ‘corporatism’ versus New Zealand ‘commercialism’.
The Australian Labor Government chose a consensual-cum-‘Corporatist strategy, whereas the New Zealand Labour Government chose a ‘commercialist/monetarist’ one. Among the reasons for the divergence were the two countries’ different institutional structures; the particular political circumstances of the Australian Labor Party (ALP) and the New Zealand Labour Party (NZLP); and the relationship of each with their respective union movement. In addition-though to a much lesser degree-the personalities involved in economic policy formation affected the different outcomes in the two countries.
4. Divergent results
There was a resulting divergence in outcomes, with the Australian economy in general performing better than the New Zealand one, particularly until the international recession of the early 1990s.
5. Divergent application of ‘economic rationalist’ strategies
The New Zealand Labour policy approach created the pre-conditions for the extension of ‘economic rationalism’ into the welfare state (including the labour market) under the post-1990 Bolger National government. In contrast, the bargained Australian Labor approach meant that ‘economic rationalism’ never really gained more than rhetorical primacy, as demonstrated by the defeat of its pure, Fightback! , model in the 1993 election.
It will be evident from this summary that we see similarities and differences between the two programs of economic reforms. They were similar in that they both chose market liberalisation as a general rule. They were different in that the ALP government tended to choose a process of consultation with interested parties in which key interest groups ( especially the unions) had some influence-and the rationalist policy outcomes were thus vitally modified. The New Zealand Labour government acted more unilaterally, using commercial analogies as a model, even for government decisions.
Superficially the two policy sets were similar, not just rhetorically but because both involved liberalisation for the purpose of internationalisation. However, close analysis shows that they were effectively different, and differently effective.
The erosion of the British economic connection
The British Empire crumbled in the postwar era, as the world economy became dominated by a new international regime led by the United States. In any case. Australasia. being on the other side of the world, could not have retained an exclusively European future. Whether the economic future was east Asian (the Australian perception) or Pacific (the New Zealand perspective), the role of Europe was diminishing.
Table 2.1 [not included] shows the trade destinations of exports and source of imports at the beginning of the 1950s, when postwar stability was beginning ( and both countries were still in the sterling zone ), and at the early 1980s as the two Labour governments were elected. The . table excludes the trade in services (such as tourism), which became more important over the period, though its inclusion would not change the basic story.
In summary, the big change for both countries is the markedly reduced importance of Europe (including Britain), both as an export destination and import source, and its replacement by Asia. Note also that trans-Tasman trade is still a minor component of Australian external trade, though relatively important but not dominant for New Zealand. What is important is that each country’s general manufacturing sector mainly trades across the Tasman.
Both the destination and composition of exports changed over the 30 years. Definitional differences make it difficult to tabulate the compositional changes as simply as the trade dependency ones, but Table 2.2 [not included] provides a broad impression. In the early 1950s Australian exports were dominated by wool, with grain, meat and minerals all in a much smaller second tier. Thirty years later, wool was well overtaken by minerals and was now roughly on a par with grains and meat. The diversification away from pastoral products applies for New Zealand, for wool with meat (and by-products such as hides and skins) and dairy products were almost all exports in the 1950s. The pastoral exports are much less prominent by the 1980s, with the gap being filled by horticulture, fish and wood products. If the data on tourism were available, it would show a magnitude comparable to other leading foreign exchange earners.
So each country shifted from being dependent upon a few commodity exports to a wider range. Yet each continues to be dependent on its primary producers for exports, modified by ( often intensive) primary processing, tourism and a little general manufacturing across the Tasman.
The impact of diversification oil the political economy
Diversification changes the internal workings of the economy, and hence the balance of political power. In essence the traditional Australasian economy was a ‘plantation’ economy, in which the farm sector had restricted linkages into the domestic economy. Later these links were enhanced by the protection (through internal regulatory interventions as well as tariffs and/or import quotas) of domestic manufacturing and other industries, which forced farmers (and, in Australia, miners) to purchase more domestic products, generating jobs off the farm. The effectiveness of this strategy depended upon the exporters obtaining a high return for their commodities. The instruments of protection transferred some of the exporters’ income surplus to the nation as a whole.
Figure 2.1 [not included] shows relative export prices (i.e. the terms of trade ) falling for most of the postwar period in both countries. This meant pastoral farming, especially, became less rewarding, and the additional resources to the economy were deployed into other uses. Now there was less farm ( and mine) income available to transfer via protection, while the new industries had more linkages to the economy.
Thus the traditional protective structure was no longer effective, while increasingly the protected industries were being involved in the export effort (via import replacement). The plantation sectors of the empire-oriented Australasian economies were in the international economy. As their importance diminished, more of, if not the rest of, the traditional domestic economy became internationalised.
This diversification story-perhaps peculiar to Australasia among the OECD countries-was (complemented by a couple of more worldwide phenomena. The Crawford enquiry on the Australian financial system, which was closely followed in New Zealand, was a response to the changing international financial system and the decreasing ability of ( especially debtor) nations to isolate their domestic arrangements from this system. Meanwhile increasedinternational communications and travel were changing the attitudes and expectations of Australasians as to what the economy could and should deliver to them.
Under any circumstances, the reform of an economic policy system is not simple. In Australasia it was further inhibited by a power elite which came from the traditional political economy of the pastoral and (in Australia’s case) wheat farmer and miners’ interests, plus the various industries that supported them or were direct beneficiaries of protection (such as import licence holders). Because parties of the right had been in national power in Australasia for almost the entire period from 1949 to 1983, the traditional power elite had consolidated behind them, preventing-or delaying-the changes to the underlying economic mechanisms upon which their power was based (see Olson 1982). By contrast the two Labour parties came to power in the early 1980s, without any partisan linkages to the old elites, and with a tradition of economic radicalism that would have to address the need for economic reform. That, of course, does not tell us what reform path they would choose.
Choosing a ‘more-market’ direction
Both countries chose a ‘more-market’ (see McLean 1979) direction of reform despite their traditions being in some form of planning. That both did so suggests that there were common phenomena driving them in this direction. These were probably a mix of five factors:
1. In the postwar era (neo-classical) economic theory became increasingly centred around concerns of the efficacy of the market (and, conversely, the possibility of ‘government failure’).
2. This was reinforced by the failure, evident well before 1989, of the centrally planned economies and attempts to reform them.
3. The election of Thatcher in Britain in 1979 and Reagan in the USA in 1980 strengthened the more-market conservative advocates, especially in English-speaking countries.
4. The ‘stagflation’ of the 1970s following the oil shocks tended to destroy faith in the hitherto dominant Keynesian paradigm. Eventually a resurgent neo-classical microeconomic paradigm was adopted as an untested alternative. This approach dominated the international economic policy agenda.
5. The increasing integration of the world financial system enhanced the power of the financial community with its more-market policy preference, especially for debtor nations.
Even so this list fails to explain why the Australasian economic reforms were wholeheartedly more-market-especially in New-Zealand-than was the case. in many other OECD countries ( although perhaps less so than the initial reforms of some Eastern European nations, albeit somewhat later).
Among the specific local Australasian conditions were:
1. The extent of diversification and the consequent need for a major internal readjustment. Tabulations by Gould suggest that New Zealand experienced the greatest external change between 1965 and 1981 of the twenty major OECD countries, but the Australian diversification was of a similar magnitude, if a little earlier (Gould 1985, pp. 38,40).
2. Australia and, even more so, New Zealand had seen among the most interventionist governments of all the OECD countries. Labour politicians in Australasia could look to like-minded associates in Europe, aware of the latter’s acceptance of a far greater use of the market mechanism than was conventional down under. This was part of an ideological revisionism which accepted that the ‘market’ may not be an inherently evil social institution so far as (perhaps non-Marxist) socialists were concerned (e.g. see Nove 1983). At issue is the extent to which the institution is useful for pursuing social democratic objectives (Scharpf 1991).
3. Alternatives, such as national planning, were largely nostalgic, ignoring the structural change in the international economy and the resulting tensions that beset both Australasian economies. Perhaps the more-market advocates were equally innocent, but if so their solutions still addressed the tensions in a way that planning solutions evidently did not
4. Finally, it might be argued that both Labour parties were captured by their traditions as national modernisers rather than as socialists. Their proud record in the 19305 and 19405 was of responding to the policy stagnation of the inter-war era, rather than of seeming to introduce the socialist millennia. Admittedly it was modernisation with a human face, but it was the radicalism of a mixed economy.
Choosing between ‘more-market’ directions
What we are trying to avoid is the easy-and popular-interpretation of Labour parties coming into office with hardly any economic policy, to be captured by an international economic policy agenda advocated by the ‘economic rationalists’ in the public service (cf. Pusey 1991) and the capitalists in business. There is an element of truth in this story, but it overlooks the fact that we can see (albeit with the benefit of hindsight) that the 1983 ALP and the 1984 NZLP election manifestos already had at least some degree of commitment to economic reform involving a more-market direction.
There was, however, no predetermined more-market line of march, and very soon the two governments’ policy directions diverged. This was evident in their mode of economic decision making. The Australian Labor government consulted key interest groups (most notably the unions, in a process institutionalised in the Accord mechanism) and its economic policy was adapted and fluctuated accordingly. The New Zealand Labour government began along this path, in imitation of the Australian success, but soon began to operate more unilaterally. This resulted in different economic policies: the Australian Labor government’s was ‘consensual-corporatist’ (Gerritsen 1986), while the New Zealand Labour government’s was ‘commercialist’ (cf. Easton 1989a).
This policy difference was reflected most centrally in the management of labour markets, as discussed elsewhere in this volume (cf. Bray & Neilson). But it also featured in fiscal and industrial policies.
The fiscal policy image of the Australian Labor government is dominated by its four successive budget surpluses from 1985/86 to 1988/89. This, coupled with the rhetoric of the then Treasurer, Keating, created an image of fiscal rectitude that fitted easily into the demonology of the anti-economic rationalists. Yet the reality is more complex. The majority of Labor budgets created more new spending than savings through program cuts, particularly with the post-1990 counter-cyclical strategies. Also the distribution of spending and cuts was consistent with traditional Labor concerns (Swank 1992). Examination of the portfolio areas that between 1983 and 1992 suffered cumulative cuts-defence and transfers to the states and the areas where new programs offset cuts and expanded overall outlays-education, health, social security, housing, industry assistance, labour and employment programs-reveal a traditional Labor fiscal policy pattern (ref. Dixon 1993, chart 1, appendix).
By contrast New Zealand Labor was in a much more difficult situation because of the stagnant economy. Between the March 1983/84 year and the 1990/91 year, general government consumption expenditure grew 8.1 per cent in volume terms while GDP grew 8.4 per cent. Social security benefits were maintained broadly in real terms, while numbers of benefits increased. Interest payments increased dramatically because of real interest rate rises, the addition to national debt of on-going budget deficits and a number of off-balance debts (major projects, producer board debt, and liabilities in the publicly owned financial sector) falling due. Despite cutting (indeed abolishing) industry subsidies and a range of tax reforms, which on the whole were revenue enhancing, the N ew Zealand Labour government was unable to reduce markedly-until very late in its term of office-the internal deficit Muldoon had left.
The facts of the Australian Labor government’s industry policy also belie the image of a non-interventionist economic rationalist government. Some sectors, for example the financial and agricultural sectors, of the economy were wholeheartedly deregulated. And after 1988 the government began to slash tariffs. But quietly (and as it turns out successfully, if the recent growth in manufactured exports is any indicator) the Industry Minister, Senator Button, for a decade oversaw a quite interventionist industry policy. This began with sectoral plans (Gerritsen & Singleton 1991) but gradually shifted to broader initiatives, such as R&D tax expenditures, adjustment assistance and various ‘positive’ schemes to overcome perceived difficulties facing mid-sized Australian exporters. In reality, the fiscal costs of this intervention have had lesser efficiency costs for the economy than had the consumer subsidies that were embedded in the tariff regime they replaced. So Labor’s industry interventionism did not decline during the 1980s, it just got smarter.
Industry policy under Labour in New Zealand was significantly different by the end of our period, though it started from a similar basis. As in Australia, before 1984 New Zealand’s manufacturing industry had been heavily assisted, often on an enterprise by enterprise basis (which was probably inevitable when in most industries there were only one or two firms). The complexity of the interventions was such that it was not possible to assess all the interactions or the effectiveness of each or all the measures. Industry studies aiming to reform assistance began in the late 1960s, in part stimulated by the declining terms of trade. But progress was slow. By 1981 the Department of Trade and Industry had become sceptical of its ability to manage the program, or even to be able to select which industries or firms were worthy of assistance.
The 1984 Labour manifesto clearly stated a commitment to reform industry assistance, especially at the border. This reflected the more-market approach of the policy community elite, although this commitment was not shared by the unions or the general public. The tensions were evident in the manifesto’s other proposal, for a large government directed and funded investment program, which was quickly dropped as the government adopted a commercialist-market economic strategy. The new Minister, David Caygill was, as Associate Minister for Finance, one of the troika responsible for the new strategy. In addition he had a personal distaste for lobbying based on benefits to the enterprise or sector.
Thus industry policy was to move towards the’ level playing field’ approach. Typically the only issues for negotiation were the speed of the move and some adjustment assistance in very selective instances. The new direction aimed at lower and more even assistance-which left unrevealed whether the ultimate goal was the abolition of all positive industry assistance measures – as well as attempting to minimise the imposts from government. (Perhaps the only significant exception was the ANZAC frigates project. The government used industry assistance arguments in attempting to build a supporting coalition in the face of widespread public opposition to the project. )
Comparison between the outcomes of the two countries’ industry policies is affected by their overall economic performance. Nevertheless the differences in external performance are instructive. Australian manufacturing exports grew 9.4 per cent per annum between 1986 and 1993, while manufacturing imports grew by 7.3 per cent per annum. New Zealand manufacturing exports grew 3.5 per cent per annum, while manufacturing imports grew 3.5 per cent per annum (BIE 1994, pp. 18-20). It could be argued that the latter figures are optimistic (better than structural trend levels ), because they are strongly influenced by the export and substituting activities of the ‘think big’ industries which came on stream during the process (and the reduction of imports following their construction phase ), and by the growth of timber products following plantings made two decades earlier.
The share of elaborately transformed manufactures (ETMs) in Australian manufacturing exports grew between 1984 and 1990 from 50.7 per cent to 60.4 per cent. The ETM share of New Zealand manufacturing exports was more stable over the period, increasing only slightly from 54.5 to 55.6 per cent. Significantly, between 1984 and 1992, Australian ETM exports to New Zealand grew at an annual rate of 13 per cent (in current prices), while the New Zealand exports of ETMs to Australia only grew by 9 per cent. Australian manufacturing was becoming relatively more sophisticated than New Zealand’s, probably in part as a reflection of their different approaches to industry policy (BIE 1994, pp. 21-2).
Faced with the modern capitalist tension between, on the one side, states, bureaucracies and the law and, on the other, economies, markets and money (cf. Pusey 1991, p.15), Australian Labor’s economic policy was further constrained by the institutional weakness of federal government and the consequent need to negotiate outcomes. The Accord was only the most obvious manifestation of that consensual ( corporatist?) imperative.
On the other hand, commercialist strategy de-emphasises state-directed economic coordination, diminishing, but not entirely eliminating, the state system in replacing the directive role of formal state structures with the formal constraint of the commercial law of market relations.
This was the approach that ultimately the New Zealand Labour government chose, although in its early stages it too pursued a strategy of summits and other consultative activities. Outside core economic policy issues, consultation often retained a significant role until the New Zealand government began publicly to fracture in 1988. Even then the New Zealand Labour government chose an extreme form of commercialisation, assuming that business was generally superior to government and applying business principles to what public business could not be privatised. The macroeconomic complement to the commercialisation approach was a reserve bank which regulated the monetary system for anti-inflationary ends (by contrast the Reserve Bank of Australia has not just an inflation but also a full-employment objective in its charter).
Why the different paths?
Why the different paths? This sort of question can be answered in two ways: in terms of structural divergences, or in terms of the differing circumstances in the two countries. We provide both explanations here. Structurally there appear to be four major differences: constitutional; party differences; party relations with unions; and personalities.
The Australian institutional system-with its formal constitution, its federal structure, and its upper house in which the government is usually in a minority-entrenches checks and balances to unilateral decision making. Policy making in Australia required the continuous formation of winning coalitions, either parliamentary or extra-parliamentary. New Zealand, on the other hand, has a much less formal constitution with fewer checks and balances to hinder the implementation of governmental priorities.
Differing constitutional arrangements have affected the structure of the two Labour parties. Despite both being out of national office since 1975, the ALP had formed several state governments, while the NZLP had no such comparable experience over the period. The NSW Wran government was the exemplar for subsequent ALP pragmatism.
Another difference was that the ALP had institutionalised factions built into its caucus and decision making. These arose largely from state party bases but also reflected ideological and policy proclivities (Lloyd & Swan 1987a, 1987b). Their existence again encouraged the policy process toward negotiated outcomes. On the other hand, the NZLP caucus is smaller, and does not contain formal factions, but instead is based on shifting networks of personal loyalties.
The ALP has ongoing and intimate links with its affiliated industrial wing, as symbolised in Bob Hawke’s effortless rise ( after resigning as President of the Australian Council of Trade Unions (ACTU)) to parliamentary leader in under three years. His successor, Simon Crean, followed Hawke into parliament and quickly into Cabinet. Another key Minister in the Australian Labor government has been Ralph Willis, who had been an industrial advocate for the ACTU. There were also several former union officials in the caucus. Symbolising this affinity was the close relationship between Paul Keating and ACTU Secretary, Bill Kelty, which became a key element in the successive renegotiations of the Accord ( cf. Kelly 1992, pp. 281-2).
The NZLP has no such record of close links at the personal or career level. As in Australia, unions are important funders of and active within the NZLP. But the only cabinet Minister in the 1984 New Zealand Labour government with a long union background was Stan Rodger, a past President of the Public Service Association, but who was ranked number fourteen (out of 20) in the ministry. This weakness was reinforced by the state of the peak trade union organisation in the early 1980s. The Federation of Labour (POL) excluded powerful public sector unions such as the Public Service Association (PSA), and was poorly led by president Jim Knox. In contrast to the Australian experience, relations between the union movement and the NZLP tended to be distant at the personal level, indicative of the organisational situation.
Personalities also have some role in the differing outcomes from the two governments. It could be said that Paul Keating and Roger Douglas were alike in their commitment to radical modernisation, though Keating (significantly) was a far better parliamentary performer ( and ultimately more pragmatic, as was seen when he became Prime Minister). Each had a personal predilection for unilateral or, as will be described below, ‘blitzkrieg’, policy innovation. The willingness of both to change markedly their policy stances suggests their concern is with making things happen rather than what happens. Douglas’s 1980 book, There’s Got to be a Better Way, was highly interventionist by his subsequent standards. Keating changed from a promoter of a consumption tax in 1985 to its chief opponent in 1993. Both took policy stances in the 1980s that contradicted positions they assumed in government in the 1970s. And Keating, as Prime Minister after 1991, resumed in part the more interventionist stance characteristic of his pre-1980s political career.
Perhaps even more important were the personality differences between the Prime Ministers of the 1980s. Hawke was older and had more’ political’ experience than either David Lange or his successor Geoffrey Palmer. Hawke’s career in the union movement meant an extensive experience with collective decision making, whereas lawyers Lange and Palmer were individualists. Hawke was trained as an economist, and had worked in quasi-economic positions for most of his life, whereas Lange and Palmer were economic neophytes.
To these structural factors could be added the different experiences of being in opposition, or more precisely their respective reactions to the differences in style between the Fraser government and the Muldoon government. Again it was not merely a matter of personalities (patrician Malcolm Fraser versus populist Rob Muldoon) but that the disparity captured the policy differences. Fraser’s government was more concerned with the introduction of right-wing policies, most obvious in the reversal of the Whitlam government’s health reforms and the ‘fight-inflation-first’ strategy. By contrast, Muldoon trumped the 1972-75 New Zealand Labour government’s Superannuation Scheme with the expensive National Superannuation Scheme, as advocated by the Labour left in the 1930s. Defeating inflation was a Muldoon policy objective, but he was unwilling to tackle it at the expense of higher unemployment, and chose instead price and wage controls. Thus their economic policy styles diverged: Fraser to the liberal right, Muldoon to a conservative interventionism.
As a rule of thumb, especially in its earlier years, one could predict the policy response of the post-1984 New Zealand Labour government by identifying the opposite of what Muldoon would have done. Similarly the Australian Labor government’s consensual policy process was explicitly the reverse of Fraser’s confrontational style, with-as in New Zealand-different policy outcomes.
The differences in policy approaches between the Australian and the New Zealand Labour governments of the 1980s were affected more by the differences between their immediate conservative predecessors than by their respective histories in government, for there had been considerable similarities between the Australasian Labour governments of the 1972 to 1975 period.
The early experience in office
Both the Australian Labor and New Zealand Labour governments took office in similar circumstances: after a snap election and a currency crisis. Even the economic components of their election manifestos were similar, mainly because the NZLP imitated the Australian approach. Despite this, there were very fundamental differences between the two parties’ experiences.
The ALP economic policy was the outcome of prolonged and detailed negotiations with the ACTU. These had begun in the late 1970s and were quickened by the post-1981 recession. By the 1983 election there was a close understanding between the ACTU and the ALP as to the content of the policy and a commitment to work together when Labor came to government. The policy was based on the premise that rapid growth was sustainable only if there was a degree of wage restraint by the unions, which were willing to offer this in return for both an increase in the social wage (the replacement of private by public consumption-a key social democratic marker) and a say in the direction of economic policy ( cf. Gerritsen 1986). This cooperation was institutionalised by the Summit conferences, plus the informal links between cabinet ministers and key trade union officials. It led naturally to a consultative style of government.
Despite being elected 17 months later (in July 1984), the NZLP was much less prepared for office. The replacement of Bill Hayden by Hawke in early 1983 merely confirmed the policy development that the ALP had undertaken in the previous five years. Lange’s replacement of Bill Rowling in early 1983 reflected the turmoil in the policy debate within the NZLP. Lange’s appointment of Douglas-who had left the Shadow Cabinet in 1980 over differences with Rowling as shadow Finance Minister did not stabilise economic policy. Indeed Douglas’s own economic thinking was rapidly changing. In mid-1983 he began on the course that led to his commercialisation strategy (Oliver 1989).
Meanwhile the weakly led Federation of Labour had a preference for a status quo that was traditionalist rather than modernising. Modernisers were in a minority and some left the trade union movement (Campbell & Kirk 1983). So there was not really any practical possibility of coming to the sort of agreement that the Australians had in the Accord. In any case it was evident that the FOL could not deliver their side of any bargain. Thus there was no NZLP economic policy consensus at the time of the election. The election manifesto was modelled on the 1983 ALP one, convenient to disguise Labour’s internal differences but with no commitment to it by Douglas, soon to become Minister of Finance.
Yet, after nine years of Muldoon, New Zealand yearned for consensus. A series of consultative summits took place. Indeed the 1984 Economic Summit Conference was influential in the setting of the 1984 wage path shortly after. But, in parallel, an alternative economic policy was being prepared. Essentially it involved the government taking unilateral initiatives. the process of ‘policy blitzkrieg’-a lightning, surprise, radical, policy strike ( cf. Easton 1994). Increasingly, within this approach was a policy content of economic rationalism, or ‘Rogernomics’, as advocated by the New Zealand Treasury, and which was an anathema to the union movement.
The two approaches to government are illustrated by the different courses of their reform of indirect taxation.
The course of the indirect tax reform
In the budget of November 1984, less than four months after the election of the New Zealand Labour government, Douglas announced a comprehensive Goods and Services Tax (GST), to be introduced at a uniform rate in 1986. At the same time a miscellany of sales taxes would be abolished, and there were promised offsetting cuts in income taxes.
Douglas had long been exploring tax reform in a not especially organised way (Douglas 1980). There were vague references to it in the NZLP 1984 election manifesto. Douglas’s preference (like Keating’s in 1985) was for a retail sales tax. Treasury had supported a VAT-like tax since the 1950s. Following the McCaw Committee Review of 1981, Treasury came to favour the GST form (which involved administration via the income tax system rather than separately) and subsequently persuaded Douglas of the GST’s merits.
It is less clear whether the new New Zealand Cabinet was persuaded or overwhelmed. It made the decision, without public consultation, about the same time as the government was involved in the Economic Summit Conference. The White Paper invited submissions but any consultation was on the details of implementation, with the broad strategy not for debate. This was a characteristic feature of almost all subsequent consultations on other economic proposals (though non-economic policy making was conducted more consultatively). Initially there was considerable resistance to the GST within Labour Party regional conferences, although eventually the NZLP adopted the proposal, the membership acquiescing through loyalty to their government.
Australia still does not have a comprehensive indirect tax system. The Fraser government had considered and rejected indirect tax reform in 1981. In the December 1984 election campaign, as part of his ‘trilogy’ commitment (Gerritsen 1993, p. 14), Hawke had promised a Tax Summit. In May 1985 the Labor Cabinet initially adopted the Keating proposal for ‘Option C’ , a retail sales tax with income tax and social welfare benefit offsets. The influential Minister of Finance, Senator Peter Walsh, publicly opposed the package arguing both that it would be inequitable, for there was insufficient revenue to compensate all the disadvantaged, and that it would hike inflation through undermining the Accord wage-setting process.
In the end, Walsh’s (and other quieter Ministers’, such as Button and Willis) concerns proved persuasive, first with the ACTU and then through it with the Prime Minister, and at the June 1985 Tax Summit Keating was forced to abandon his package; he had proved as unsuccessful at selling his package as Douglas would have. if he had had the same task. Comprehensive indirect tax reform lapsed. Instead the Australian Labor government focused on both broadening the tax net through the introduction of capital gains and fringe benefits taxes, some reform of the wholesale sales tax regime, and introducing successive income tax cuts (the latter strongly supported by the ACTU).
One epilogue to the story is well known. In the Australian 1993 election the Liberals campaigned on introducing a comprehensive consumption tax, the GST. Keating, arguing that .it was no longer necessary, barnstormed the country opposing it and, surprisingly (to most commentators ), won the election.
Perhaps the New Zealand epilogue is even more ironic. As Walsh had forewarned Australians in 1985, the New Zealand inflation rate hit an all-time record high when the GST was introduced in October 1986, although the wages reaction was more restrained as unions offset their wage demands for the reduction in income tax. But there was insufficient revenue to compensate everyone, especially as big tax reductions went to the rich as the top marginal income tax rate was lowered. In the short run, the revenue deficiency was met by a larger government deficit, obscured by the timing effects of revenue .flows. Perhaps the short-term benefits of a fiscal boost assisted the NZLP in its election campaign eight months later. However, in its second term, Labour faced chronic fiscal deficit pressures, which led ultimately to cutting back government spending on the disadvantaged, as the Australian critics had predicted.
Ironies aside, we have here all illustration of the operational differences between the two Labour governments: the New Zealand approach, perfected by Douglas, of unilateral policies imposed without consultation, compared with Australian Labor’s requirement for consultation with the ACTU in spite of Keating’s personal preferences for the Douglas-type blitzkrieg.
As a result of this policy-making process difference, the New Zealand Labour government was able to introduce. much more radical changes than its Australian counterpart. Within its shorter term of office of just over six years it was able to privatise more than Australian Labor has in twelve years and institute more microeconomic reforms.
In Australia microeconomic reform has been bargained, incremental and slow-vitally influenced by the ALP’s partisan coalition (Gerritsen 1992). Much of it is still caught up in the interstices of Australian federalism, in particular the reform of public utilities, which are mostly owned by state governments who use their profits to supplement consolidated revenue. By contrast, the State-Owned Enterprises Act of 1986 comprehensively ‘reformed’ New Zealand’s government business enterprises. The Australian Labor government was still struggling with labour market reform in 1995. The New Zealand Labour government had disposed of this rapidly, with its 1987 Labour Relations and 1988 State Sector Acts. Yet during the 1980s the Australian economy generally performed better than the New Zealand one.
Table 2.3 provides measures of economic performance, based on an OECD source for comparability, for the period 1985 to 1992. This is after the 1983-85 boom, which in New Zealand might be attributed to Muldoon and the startup of the Labour Government, rather than to their policies. It may seem unfair to lumber the NZLP with the period after it lost power in 1990. However the policy process is characterised by inertia and some of the policies introduced after the 1990 election were the logical continuation of Douglas’s policy development. In any case, had we chosen the shorter period to 1990, we would have formed exactly the same conclusion: that the Australian economic performance was broadly superior to the New Zealand one in the circumstances.
We need to be aware of any exogenous events that confuse the data. External events seem to have favoured New Zealand more. Figure 2.1 [not included] showed the terms of trade, probably the best available – though by no means perfect– measure we have of external conditions. New Zealand’s were flat during the 1980s, with an upswing at the end. Australia’s were in broad decline, with a sharp downturn in 1986, and some rebound after.
The data in Table 2.3 [not included] allow some comparison of Australian and New Zealand economic success, especially relative to the OECD. On inflation New Zealand does well, either absolutely or in comparison to Australia and the OECD. Thus New Zealand spectacularly brought down its inflation rate from well above to markedly below the OECD level. There is no official estimate of the New Zealand standardised unemployment rate for 1985, but in 1986 it was 4 per cent of the labour force. In 1992 it was 10.3 per cent. By contrast the Australian rate was 8.0 per cent in 1986 and 10.7 per cent in 1992, and the OECD rate fell from 7. 7 per cent to 7.5 per cent. Unemployment is affected by the economic cycle. Averaging the rates across the seven years, New Zealand was 8.2 per cent and Australia 8.1 per cent (and the OECD 6.9 per cent on average).
More marked was a superior Australian economic growth performance. In our period, employment growth in New Zealand was negative. While job numbers fell 5.6 per cent in New Zealand during the seven-year period, they rose 8.4 per cent in the OECD and an impressive 14.6 per cent in Australia. Volume GDP declined by 0.6 per cent in New Zealand between 1985 and 1992, in contrast to a 16.8 per cent increase in Australian volume GDP and a 19.7 per cent growth for the OECD. In 1985 New Zealand GDP per capita was 90 per cent of the OECD average (and 98 per cent of Australia’s). By.1992 it was 76 per cent of the OECD (and 91 per cent of Australia’s). The decline was faster than in any other seven years over the postwar era with the possible exception of the early 1950s, which was anomalous as it included the post-Korean War commodities boom, and the recovery from the relatively low levels of postwar economic activity in Europe and Japan.
Given its falling terms of trade, it is remarkable that Australia’s GDP growth rate was only slightly lower than the OECD average. To see why, observe that the volume of Australian exports grew 60.0 per cent, greater than the OECD average of 52.7 and faster than the import volume growth of 44.6 per cent. Thus despite import volumes rising almost twice as fast as GDP – as a result of the liberalisation of the economy – exports grew sufficiently to compensate for the falling relative price and to fund the imports.
The New Zealand story is less heroic. Again imports grew fast, almost as fast as for Australia, and the import penetration ratio rose 41.9 per cent (measured in volume terms), more than the 23.8 per cent rise of Australia, despite the import-substituting contribution from the ‘think big’ energy projects which came on-stream in this period. Meanwhile, New Zealand exports grew a miserable 19.2 per cent. Thus domestic expansion was stifled by the lack of growth of the tradeable sector.
The average deficit on current account over the seven years was 3.3 per cent of GDP for New Zealand, in comparison with 4.5 per cent for Australia. The significance of the figure is partly obscured by the low level of investment, which is very import-intensive in New Zealand. If New Zealand had invested as heavily as Australia, its current account deficit would have been nearer the Australian average. Moreover, a growing economy can sustain a larger deficit, as its capacity to service the resulting debt grows.
Both countries’ record of labour productivity over the period is unimpressive. This is especially surprising for New Zealand, because its commercialisation policies aimed to increase productivity. New Zealand’s postwar long-run labour productivity increase was about 1.5 per cent annually. Yet the increase over the seven years averaged 0.7 per cent per annum compared with the OECD’s 1.4 per cent per annum. Australia had an even lower productivitygrowth over the period of 0.3 per cent per annum, although this mostly resulted from the Accord strategy of increasing employment at the expense of productivity growth.
So some of New Zealand’s economic performance was a little better than Australia’s; much was worse, especially for GDP growth and employment. Except for Australia’s employment record, and New Zealand’s reduction in inflation, neither country performed well relative to the OECD. But the deteriorating external conditions Australia faced may explain its relative performance. The poorer New Zealand performance has no such excuse, its terms of trade decline being relatively less than Australia’s for the period.
Why the performance divergence?
Economic rationalist theory would predict that the New Zealand economy would perform better than the Australian one, since the recommended policies were implemented more quickly and more comprehensively. Even with a more favourable external environment New Zealand did worse. How are we to explain this?
The explanation of traditionalists would be that economic rationalism is mistaken, and damaged the economy. But what was the alternative? As we have argued, market liberalisation was probably unavoidable, given the external sector experience of both economies up to the early 1980s. Perhaps there was some other market liberalisation path that was viable? The economic performance evidence above suggests that such a path approximates closer to the cautious Australian policy model than to the more radical New Zealand one.
New Zealand economic rationalists, when on the few occasions they have been willing to confront the poor performance of the New Zealand economy under their policies, have resorted to two kinds of argument. The first is that New Zealand, as a result of Muldoon’s interventions, was much worse placed than Australia in the early 1980s. Challenged to provide quantitative evidence of this assertion, they have lapsed into reductionist assertions that New Zealand had previously undergone more comprehensive interventionist distortions of its economy. While this is probably true, it is irrelevant because it is based on the assumption of the superiority of the economic rationalist approach (which is what we are here trying to evaluate ).
On the other hand, there is some argument that New Zealand was well placed for strong economic growth in the early 1980s, and that it failed to seize that opportunity. One analysis prepared for the 1984 New Zealand economic summit argued that a GDP growth rate of 4 per cent per annum was possible (Philpott 1984).
The second claim is that New Zealand will perform better than Australia in the future. This is usually backed up with scattered data and anecdotal evidence from the 1994 year. The difficulty with the claim is that it will be some years before the comprehensive database will be available to test the assertion.
Economic rationalist enthusiasts might want to argue that their policies were applied ineptly in New Zealand, arguing that such applause as they gave in the past resulted from misleading information from New Zealand colleagues. While earlier we did not rule out personalities and their preferences as having an impact on outcomes, we were loath to place entire weight on them. Similarly it would be wrong to give too great a weight to incompetence to explain the poor performance, were the facts of relative ineptitude true.
The final argument is that the more corporatist approach of Australian Labor was more successful than the commercialist approach of the NZLP, exactly as the ALP strategists had predicted when they chose it in the early 1980s (and despite the difficulties they faced from a deteriorating external environment). This hypothesis does not require Australia to have had superior microeconomic reforms to New Zealand. Even if New Zealand’s microeconomic reforms were superior, the corporatist macroeconomic strategy of the Australian Labor government delivered a superior macroeconomic performance, which more than offset any microeconomic deficiencies. This hypothesis is so intriguing that we elaborate it in our final section.
Corporatist vs commercialist economic strategies
We began this chapter considering the case that social democratic governments were subjected to the same globalisation-induced pressures for economic policy convergence as were non-Labour Western governments. Yet Australian Labor resisted implementing pure more-market policies. It generally eschewed contractionary fiscal policies, even expanding social welfare and regulatory wages policy initiatives (through compulsory superannuation and training levies) and-contrary to its public rhetoric–conducted an active industry policy. In other words, like some European Social Democratic governments (Katzenstein 1985), Australian Labor was willing to forgo some efficiency ga~ns in the name of redistributing the social costs of economic adjustment. In that sense, it behaved in a manner traditionally associated with social democratic governments (Hibbs 1987; Hicks & Swank 1992; Korpi 1983).
As already mentioned, in the early 1980s the ALP had decided it could get superior economic performance in additional growth and jobs without additional inflation, if the unions would restrain their wage demands in exchange both for enhanced social wage outcomes and social welfare benefit levels and for a fuller role in national decision making. Despite the political trauma of each renegotiated Accord, compounded by the external shocks to the Australian economy over which the negotiators had no control (the coefficient of variation for the Australian terms of trade was 58 per cent greater than the New Zealand one over the 1976-91 period), there was significant economic expansion, without excessive inflation. It may well be that the poor labour productivity performance of the economy was a result of giving priority to job growth within the feasible output growth path.
In essence, Australian wage increases were restrained below price increases, so the real exchange rate fell. This improved the competitiveness of the tradeable sector. Thus the rise in import penetration was not as great as for New Zealand, despite the liberalisation and faster growth, while the Australian export sector increased its share of the world market. In return for the wage restraint, the unions negotiated increases in the social wage, which together with the rise in employment appear to have satisfied most workers ( as indicated by the ability of the ALP to maintain its electoral support).
Similar institutional factors did not affect policy in New Zealand over the period. The New Zealand Labour government did not pursue the ALP corporatist strategy, despite it being a central feature of their 1984 election manifesto. There was an ‘accord’ of sorts cobbled together in back rooms for the 1984 wage round. But it was not pursued. We have already suggested reasons for this: the lack of empathy of the majority of the New Zealand Cabinet with the union movement, and the unions’ own fragmentation and inability to deliver on a deal, plus their lack of commitment to a modernisation strategy.
So the New Zealand Labour government was left to reduce inflation by a monetary disinflation, while maintaining a large government deficit. This generated an overvalued exchange rate as capital flooded in seeking the high interest rates, which depressed domestic prices by squeezing the tradeable sector, and thence the economy as a whole. Import penetration rose sharply, but there was not a compensating lift in the export effort because of the deteriorating profitability of exporting. The costs of the policy were lost output, jobs and investment, which may well be irrecoverable in the long run.
The New Zealand Labour government could have tried to develop a corporatist strategy by building up the unity of the unions and enticing them into realistic decision making. But there was no one to do it, and when number three in Cabinet, Mike Moore, tried to in 1988 it was too late, for by then all trust had been destroyed. In any case, by late 1984, Douglas’s unilateral decision making was becoming obvious. He did not want to pursue a corporatist strategy, which would have diminished his policy autonomy. Douglas’s advisers did not either, instead encouraging the extreme commercialist strategy that became the hallmark of the New Zealand Labour government and has been continued by its National successor.
There is one further benefit of the Australian approach. Suppose a policy proposal is misconceived and does not give the outcome that its advocates promise. What mechanisms are there to sift it out from a competent proposal? Once the Treasury and its Minister advocate a policy, the New Zealand approach has relied almost entirely on the wisdom of the Cabinet to assess its merits, whereas a more consultative approach places a decision in the public domain and thus subjects it to a broader scrutiny. Thus, the gains of the Douglas blitzkrieg approach in avoiding the power of interest groups have to be offset by the losses from implementing bad decisions. The New Zealand approach assumed that the business model used by its Treasury was the uniquely correct solution. The more consultative approach of Australia Labor allowed that even its Treasury or Cabinet could make errors.
If our suspicions are right, and it was this difference between corporatist and commercialist economic policies that mainly determined the relative performance of the two economies, we might summarise the situation in one of two ways:
1. In contrast to the Australian Labor government, the New Zealand Labour government was unable to adopt the more efficient strategy because there was not the united labour movement upon which its rhetoric was based. So it disillusioned a generation of voters (Vowles & Aimer 1993) and ensured victory for its opponents.
2. The difference was that while Keating and Douglas were both instinctively blitzkriegers, the ability of Hawke to keep his Treasurer in check in the initial years led to a superior economic performance. It was only following the failures (excessive tightening) of monetary policy from the late 1980s and the mismanagement of the ensuing ‘recession-we-had-to-have’ that the relative Australian economic performance has faltered.
No doubt the two views are not the whole truth, even together, but almost certainly each is an important part of the truth. However, whatever the truth, the ALP strategy was more politically efficient, allowing it in the face of a severe, largely policy-induced, recession to win the ‘unwinnable election’ of 1993. New Zealand Labour not only lost office in 1990 but paved the way for the National government’s even more vigorous extension of the commercialist strategy.