The End Of the Golden Wether

The economic earthquake, thirty years ago this week, continues to shape New Zealand.

Listener: 14 December, 1996.

Keywords: Growth & Innovation; Macroeconomics & Money;

On 14 December 1966 the Wool Commission found itself buying in bales of wool offered for auction. This arrangement had been devised in the early 1950s to provide a floor price for wool, evening out the troughs in the fluctuations for the commodity whose price was set mainly on the auction floor. Each year a floor price was set. When offers were below this level the Commission would bid – on occasions even make small purchases – to push up the price to above the set floor level. But typically their involvement was minuscule.

In the 1966/67 season the floor price had been set at 36 pence a pound, 5.5 pence below the average for the previous season. The 36 pence level must have seemed safe, since it had been exceeded in nominal terms in every year since 1948. The last time it was at that level relative to the overall price level was back in the depressed 1930s.

Prices were weaker in the early part of the new season compared to the last, and continued to deteriorate. At the Auckland auction the average price was 35.3 pence, with the Commission buying in furiously. By the end of the season it had bought a total of 645,786 bales, over a third of the clip – fourteen times more than the previous peak of 1958/9.

It was the end of the golden wether, for with the exception of the 1972 and 1973 world commodity boom, wool prices were never to recover to the real levels that had been taken as normal in the first twenty years after the war. In those days wool was so important in exports, that the collapse its revenue, while meat and dairy price export prices continued to weaken, meant that the New Zealand economy had to undergo a major restructuring if it were to survive. Not surprisingly, whereas up to 1966 New Zealand GDP had grown at a rate similar to the rest of the OECD, with full employment and low inflation, for the following decade, the economy grew more slowly than the OECD, while unemployment became evident and inflation was rife.

New Zealanders once had a blind confidence in themselves. Any thoughtful analysis would have said that since the economy, dependent for almost 80 years on pastoral exporting, was ruined the best strategy was to leave. Some did – the first net out-migration since the 1930s. But most stayed. Some prayed that the downward trend in pastoral prices would reverse – it did not. The rest of us got on to diversifying the economy. Today you are told that farming provides over half our exports. But that involves including non-farm exports such as forestry in the half, ignoring tourist exports (our single biggest revenue earner), and treating the processing after the farm gate by the manufacturing sector as farming. (Moreover the farm effort is no longer just pastoral products, for there are thriving horticulture exports.) Even so, nobody claims that 90 percent plus of export revenue is from wool, meat, and dairy products, which was the proportion in the 1950s.

It was a magnificent economic achievement – perhaps the greatest in the post-war economy. Economic historian John Gould reports that New Zealand experienced a greater export diversification than any other OECD country in the 1970s. Whereas we had been very concentrated with few products and few destinations before 1966, by 1980 New Zealand exporting looked normal.

Like an earthquake which changed the course of rivers, of where people live, and what they thought about the land, the 1966 wool price collapse, and the associated meat and dairy price falls in relative terms, have changed the way we think about the economy and New Zealand society. Sure there is the nostalgic brigade, those strange bedfellows of farmers who still think they are the key to New Zealand’s economic growth and protectionists who want to return to the pre-1966 economic mechanism too. But the rest of us have had to adapted to the new diversified economy.

One of the oddest roles was played by Robert Muldoon, who as Minister of Finance presided over all but three years of the massive diversification of the external economy. Yet he was paralysed facing the next step of the internal liberalization of the economic mechanisms – of “more-market” – which the external diversification required. That was the task of his successor Labour Government. But just as Muldoon had pursued extremist repression, his successors went to the other of extreme.

It is not accidental that it took the hung parliament of 1993 to 1996 to finally give New Zealand tempered rationality. That is what the public sought when they voted for MMP. The old FPP system was a residual of the pre-1966 society which could be rigidly organized on the simple dichotomy of pastoral farm exporting and domestic protection. The two party FPP parliament worked in such simplistic circumstances. As economic and social complexity grew it gave power to extremism, although the public wanted moderation. We are still struggling with the aftershocks of the great economic earthquake of thirty years ago.