Going to the Wall

The Cook Islands is in Crisis – its Economy Awaits Major Structural Change
Listener 2 November, 1996.

Keywords: Macroeconomics & Money

While “hitting the wall” is a phrase beloved by politicians and journalists, it is not a rigorous notion. If it means a crisis which is so drastic that there had to be major policy change, New Zealand did not hit the wall in 1984. There was a currency crisis, in which some people panicked, while others magnified it out of proportion to justify their policies and their grab for power. However the Cook Islands has not just had a currency crisis. It is facing the need for major structural change. Their economy might be said to be hitting the wall. In comparison, New Zealand’s was the bump of a dogem.

The Cook’s problem arose because while its economy continued to grow in the 1980s, it could not create enough jobs in the private sector. Indeed there was some private sector contraction, as a result of the New Zealand stagnation (fewer opportunities for exports), and the change in our border protection which reduced the privileged access for Cooks exports.

The government responded by increasing the size of the public sector. The Cooks had four to five times as many government employees relative as other South Pacific nations. On Raratonga there were almost as many public servants as households, so the typical house had someone on the public payroll. On some job-scarce outer islands the Department of Agriculture employed fifty doing the work of five. If New Zealand had their proportion we would have 650,000 public servants.

But how is the government to pay its workers? At best tax revenue is only as strong as the private sector can pay, but the Cook’s tax system is not very efficient either. Short of revenue the government turned to deficit financing. Inconveniently for the government, the workers did not want to keep their Cook Island money, but spent it. Much of that spending was on imports, so the local money got converted into New Zealand dollars, until the banks ran out of foreign exchange. Unlike New Zealand in 1984 this was not a temporary inconvenience, with the money flowing back shortly after. As long as the government continued to employ the workers, with cash not covered by other revenue sources, the drain would continue. Since it could not so indefinitely, public expenditure had to be cut: wages were slashed, and government employees laid off.

Fortress Cooks was not a solution. The economy is too dependent on imports for import controls to work. The Cook Island dollar is not strong enough for it to be isolated from the world financial system. Tourists and migrant remittances would make ineffective foreign exchange controls. Deficit financed public sector job creation only puts off the day when structural adjustment has to be tackled, and the created debt added to the overhang. Structurally the Cook Island economy was more like those of East-Central Europe before the Berlin Wall fell, and it is going through the same agonies (with perhaps as little understanding by the people of the process). Together with some weakening in tourism, economic forecasters think the economy will contract by about 25 percent over three years.

In addition the New Zealand government has decided to address its supplementary assistance to the Cook government budget. It would seem that this is not a reduction in overall aid, although it could be in the future (and balance requires the recording of a 10 percent increase in the general aid budget this year). The intention is to move the funding away from unspecified grants to specific projects. Ironically the first project is to assist the redundant officials by giving them courses (on full pay) to help their transition into the private sector.

For the Cooks needs a stronger vibrant private sector. To this end the government is privatizing its businesses, and hoping that its ex-civil servants will go into business. Recently much fallow ground has been put into crops, but there is not a lot of future in subsistence farming. Other than tourism there does not seem to be many opportunities for private initiative.

This makes migration to New Zealand very attractive. The GDP contraction of 25 percent may be associated with a 10 percent plus population fall, as Cook Islanders with their New Zealand citizenship seek better opportunity here. Those who suggest that their New Zealand citizenship should be withdrawn are not only unethical (one does not lightly withdraw citizenship from a racial minority), but also stupid, because it will encourage waverers to come here earlier so they are inside if the drawbridge is raised. In any case the 2,000 or so Cook Island Maoris, over the next year, will be absorbed into their well established communities and families already living here. But can the Cooks afford to lose these people?

Hitting the wall is painful, but it is a consequence of not addressing the earlier structural problems, hiding behind deficit financing. The consequential debt shifted the burden from the current generation to a future one. In the case of the Cooks the future has arrived, and its people are feeling the impact of the past measures to delay its arrival.