A Coiled Spring

Prologue to “The Commercialisation of New Zealand”

Keywords: Political Economy & History;
 Following the introduction of refrigeration in 1881, New Zealand developed as a specialist pastoral exporter of meat, wool, and dairy products, mainly to Britain. Before that, distance from markets had confined the economy to exported quarried resources (especially gold) and wool, tallow, and grain. The freezing technology opened up the possibility of exporting over long distances carcasses and butter and cheese, while Britain’s open market for foodstuffs provided a large and profitable destination.[1]
            Throughout the first half of the twentieth century New Zealand steadily developed high productivity farming based on sheep, providing meat and wool, and dairy cows (with export beef herds developing later). It was a technology which involved sophisticated growing of grass, which was first processed by an animal, which in turn, was processed by the freezing works or dairy factory. In export terms New Zealand was a processed grass monoculture. Its state of dependence was such that in a typical year between 1920 and 1950 over 90 percent of exports were wool, meat or dairy, and over 60 percent of those exports went to Britain.
            Given a favourable climate, but not especially suitable soils, this high technology pastoral export strategy lifted New Zealand to one of the highest standards of living in the world through most of the twentieth century. However it was a third world commodity export strategy. Despite the prosperity it generated the economy suffered from the two standard defects of commodity exporting: price volatility and vulnerability to competition from others.
            These issues were acute in the early 1930s. The response was to evolve mechanisms designed to insulate the economy from price fluctuations. On the export side this largely involved smoothing farm income through allowing producer boards to borrow from the Reserve Bank. On the import side there could be some overseas borrowing to smooth export revenue deficits, but there also evolved a complex, comprehensive, and erratic system of domestic protection to save foreign funds and generate jobs (for pastoral farming is not labour intensive). External protection tended to be via import controls (first imposed in 1938) and tariffs, but it was supported by internal interventions including price controls, licensing requirements, and threat of corrective intervention for recalcitrant firms.
            The theory of effective insulation requires the correct forecasting of the average level of the commodity terms of trade (export prices relative to import prices). In fact the post war world was changing, depressing the average return for pastoral producers. Britain was less willing to permit unlimited imports of foodstuffs, not least because it was beginning to support its own farmers – a carry-over from the increased self sufficiency of the war days. Ominously, Britain was not alone in this increasing of support for farmers. A key element of the European Union was the Common Agriculture Policy which over-produced dairy and meat products, dumping the surpluses into third markets, depressing New Zealand export prices. The United States and other rich Northern Hemisphere producers behaved little better. While wool, an industrial input, was not subject to the same border discrimination, its market was being undermined by the rise of synthetic alternatives. Butter was similarly undermined by margarine. The markets and prices for processed grass were under pressure in the post war era. After a some skirmishes, the great collapse was in late 1966, when the terms of trade fell sharply. Except for a misleading recovery in the 1972-1973 world commodity boom, they have remained depressed relative to the first half of the post-war era.

Diversification: 1966-1979:
 Faced by a decline in pastoral profitability the economy diversified out of pastoral farming into other export activities (and into markets other than Britain). The diversification was spectacular. Farming moved into a wide range of horticultural products (most notably kiwifruit) and, to a less extent, goat meat and venison. Land was diversified into forestry, while plantations established in the 1930s began the exporting of sawn wood, chips, pulp, paper, and other wood products. There was a boom in fishing. Electricity was exported in aluminium refined from imported bauxite. Raw iron sands were shipped to Japan. Inbound tourism developed, becoming New Zealand‘s single largest foreign exchange earner.
            There was also manufacturing diversification and exporting, especially with further processing of the resources. Carcasses became boned out, wool was scoured, dairy product exports were extended to variety cheeses (and not just cheddar), casein, dairy based deserts, and even milk based pharmaceuticals. A nice little line developed in the export of dairy equipment and scouring equipment. (Later there were exports of farm advisory services and farm user computer software.)
            Markets were also diversified as the accompanying table shows. By the 1990s, Australia, Japan, the United States and Greater China were all more important than Britain, as was now the rest of the European Union. In total East Asia took more than a third of exports.


 Percent of Total

                                  1952 1965   1994
     Britain                      65.5 50.8    6.0
     Other 1990 European Community     12.0 17.1    9.5
     United States                11.4 12.3   11.3
     Australia                    1.5   4.7   20.9
     Japan                        1.5   4.3   14.6
     Greater China                  .0*   .7    7.7
     Middle East                    .0*   .1    3.9
     Other Asia                   0.9*  1.2   12.8
     Oceania                      0.6*  1.2    4.0
     Latin & Central America      0.9*  1.5    3.8
     Canada                       2.2   1.4    1.8
     Eastern Europe               1.5*  1.0    1.1
     Other                         2.0*  3.7    3.2
     TOTAL                       100.0 100.0  100.0
 Source: New Zealand Official Year Book (various years).
Notes:  * some exports to area groups may be in “other”

            These changes were socially demanding in that they involved cultural diversity. Halal killing for Middle East markets had to be instituted into the freezing works; products had to be rewrapped and marketing redesigned for new territories. The home away from home that was Britain no longer dominated export thinking. New Zealand exporting is still commodity based, but today there is a greater diversity of commodities and destinations.
            John Gould shows New Zealand exports were highly concentrated in product and country terms in 1965 compared to those of other OECD countries; they were near average by 1980.[2] The diversification effort was a major one, and that plus the fall of the terms of trade slowed down the rate of economic growth in New Zealand in the 1970s. But the changes had been almost entirely in the exportable sector with little modification to the highly protected and insulated domestic sector up to 1979.
 Reluctant Internal Restructuring: 1979-1984

By the late 1970s the New Zealand economy faced six major problems.
            1) While there had been considerable external diversification, the domestic economy was still insulated, and lacked the responsiveness that the external sector required. For examples: [3]
            i) Foreign exchange dealing involved a government licensed cartel of the trading banks, who charged high margins. The diversification generated more exporters who needed more complicated services.
            ii) Domestic regulation of transport forced the use of rail services which were costly and often of inferior quality.
            iii) Import licensing meant that the exporter was not always able to obtain the most competitive inputs of raw materials and services.
            2) An increasingly sophisticated population, especially the well travelled rising urban middle class, were not always able to obtain the consumer goods and services they desired. For instance
            i) Price controls on bread were discouraging the establishment of specialty varieties and specialty bread shops, which appeared when they were removed in 1979.
            ii) Shopping, drinking, and dining facilities were often restricted to inconvenient hours for the customer.
            iii) Import controls restricted entry for desired products.
            3) New Zealand faced a complicated energy problem. While traditionally self sufficient in electricity and coal, New Zealand had imported transport fuels. In the late 1960s the Maui gas field was found, then the fourth biggest in the world, by size far outstripping the standard industrial uses for gas in New Zealand. Adding to this excess energy supply was a growing excess of hydro power in the South Island. Meanwhile world oil prices rose in the 1970s (and fell in the mid 1980s).
            4) New Zealand was in a strong inflationary mode (compared to other OECD countries). Typically the annual inflation rate exceeded 10 percent throughout the 1970s.
            5) There was a severe fiscal deficit, that is the New Zealand government was spending much more than its revenue. The deficit was hidden by inflation because while the government debt grew in nominal terms, the value of the old debt was reduced in real terms. At the same time the deficit contributed to inflation by its monetary injection, and increased pressure on resources. In a further complication which is typical of the times, interest rate controls were used to keep down the cost of government debt, but they distorted investment decisions. When the wage freeze was introduced, there were income tax reductions to make the controls more palatable, adding to the deficit.
            The economy was riddled with interventions introduced to moderate unfortunate by-products of an earlier interventions. In turn they required further interventions to deal with their side effects. No one understood, or could understand, the total impact of all the interventions so numerous complicated and interactive were they. But there was an increasing view that they were bad, especially for key growth sectors.
            6) The system of government suffered from a “sclerosis”, in that it was increasingly hard to be able tackle anything but the most urgent problems. Its structures and processes had evolved to the point where their was little rationality in them, and yet they were unable to rationalize. Examples appear in later chapters of this study, so only one need be given here. In 1982 the extraordinary variety of legal statuses of the various State Owned Enterprises could only be explained by historical experience. [4] Yet attempts to create a more coherent system were stalled.
            This could be explained by the personality of Prime Minister Robert Muldoon, who had been radical in the late 1970s when first appointed to the finance portfolio but, as so happens with such politicians, was now reluctant to countenance further change. However there is a more general explanation. Mancur Olson, in his The Rise and Decline of Nations, argued that a society which enjoyed political stability, generated powerful special interest groups who reduced the flexibility of administrative and political response to new circumstances and shocks.[5]  Although the study did not become a significant part of the New Zealand debate until some years after the reforms began, it could have been a bible for the reformers. The extraordinary political stability of the post-war era, dominated in 29 out of the 35 years to 1984 by one party, National, and where in truth there was much policy agreement by the other, Labour, meant that the pressure groups seemed to have a headlock on political and administrative innovation, a sclerosis which was all the more evident given the dramatic changes to the external sector, and their pressing on the domestic sector.
 The first two problems were tackled in the 1979 budget which introduced a program of reducing external protection, and subsequently with a phasing out of some domestic interventions. Although there was market liberalisation going back to the 1950s, there was a marked quickening up to 1982, and some continuation beyond.
            The energy problem was tackled by a program known colloquially as `Think Big’, in which large energy intensive manufacturing uses were encouraged, and gas was reticulated throughout the North Island. Think Big was controversial, although the major public debate hardly covered what, with hindsight, was the major issue. While there was some recognition that there was a downside risk to the strategy if oil prices fell, little attention was given to who would bear that risk. Prices fell well below expectations. In every case the arrangements with the private investor were such that when there was a downside outcome the loss was borne by the general public (usually the taxpayer, but sometimes the motorist). It was a good example of a situation where intervention was so complicated, no-one knew what the effects would be if something went wrong. So the Think Big strategy heightened the fundamental tension in economic policy. Pressures from consumers and the diversifying export sector were for market liberalisation, while the energy based program was highly interventionist.
            These tensions were further heightened when in June 1982 the Muldoon government imposed a price and wage freeze of draconian intensity in terms of scope (almost total) and length (almost two years). A one seat majority meant the government had to be seen to be doing something about inflation (and quickly, given the possibility of a by-election). The conflict with market liberalisation, in which prices are meant to be flexible, is obvious enough, and the above story of the unintended consequences of price controls on bread choice indicates the complex outcomes of the controls. Even more complicated was the way out of the controls: how was wage and price explosion to be prevented when they ended?
            Admittedly the government continued to liberalise slowly, especially when that would put downward pressure on prices: foreign exchange dealing was opened up to all reputable comers, restrictions on inland freight transport favouring rail were dropped, while Closer Economic Relations (CER) promoted free trade with Australia. Nevertheless those in the external sector found themselves under an increasing tension of all sorts of restrictions in their domestic markets, while they sold in much more open overseas markets. Such export subsidies manufacturers and farmers received were being threatened by countervailing measures in the exporters’ markets. The government, led by the increasingly unpopular Robert Muldoon, gave the impression it was at best reluctant to liberalize, and eager to intervene. Consumer choice remained restricted.

 Rex Fairburn’s poem `Conversation in the Bush’, goes

            `Observe the young and tender fronds
            `of this punga: shaped and curved
            `like the scroll of a fiddle: fit instrument
            `to play archaic tunes.’
                                                   `I see
            `the shape of a coiled spring.’
 Many saw the New Zealand which elected a Labour government in July 1984 as a green and pleasant land. Events proved it was more a coiled spring.

Go to top

1. This prologue is elaborated in Easton, In Stormy Seas (1997).
2. Gould (1985).
3. The examples come from Bollard & Easton (1985).
4. Johnstone & von Tunzelman (1982).
5. Olson (1982).
Go to top