Chapter 5: The Great Diversification: 1966-1984

A chapter of Globalisation and Welfare State

Keywords: Globalisation & Trade; Growth & Innovation;

With the collapse of the price of wool in 1966, came the end of the economic miracle. Although the price collapse was rapid, it took longer for its implications to work their way through, while the inevitable noise obscured the long term trend.

Registered unemployment rose in 1967, and except for 1974 was never to get back to the levels of the early post war period. The numbers of unemployed beneficiaries show a similar pattern. Migration was another indicator of growing stress in the labour market. Excluding troop movements and temporary tourists, there had been a net inflow of migrants every year between 1937 and 1966. Suddenly, there was a substantial outflow for three years, coinciding with the peak years of the rise in unemployment.

The transition was confused a bit by the world commodity boom of 1972 and 1973 which gave exceptional prices for wool and other pastoral products. Hence the good labour market year of 1974 from the flow on. But the respite was temporary, and following the oil crisis of 1973 the terms of trade dropped back to their level preceding the boom, and even lower.

The labour market resumed its deterioration, and unemployment became increasing visible, with further net out migration from 1976. No longer able to absorb surplus labour in its trading enterprises and bureaucracy, the government began major work creation schemes. Since eligibility depended being registered as unemployed with the Labour Department, the numbers of registered unemployed jumped, giving the impression of a sharper rise in unemployment than actually occurred. Nevertheless true rates were rising. Almost 5 percent of the labour force reported itself as unemployed in the 1981 census.

With rising levels, came rising stress on the unemployed, and rising expense to the government, as the numbers of beneficiaries rose. In March 1976 there had been 5,217 on the unemployment benefit, in March 1981 there were 35,666, and the government was funding other potential unemployed on the Domestic Purposes Benefit and on work schemes. It is no accident that in 1980, the fiscal cost of the unemployment benefit was cut (by making it taxable for single beneficiaries), the first of a regular pattern as the government tried to restrain the cost of the welfare state.

Practically it meant the categorical social security system was breaking down for those unemployed. As they came to the gate they could explain they could not get a job. For many that was true, but others were happy to live cheap on it, without a serious attempt to obtain work. (A common anecdote was they went surfing, although if there was no job surfing may be a non-stressful way of coping with unemployment.) The behavioral response became increasingly significant.

Job creation was a way of dealing with this, since the applicant could be allocated to a government funded job. There were numerous schemes, perhaps the best known was the PEP (public employment projects), but they had been implemented hastily, and their purpose and design had not been thought through carefully. While the rhetoric was the workers doing useful public activities while obtaining work skills, the reality was that sometimes such work that was done was of little public value, and the skills the workers obtained were minimal. Moreover the schemes were expensive, for the workers were paid at award wages rather than the lower rate of the dole, and they required materials and supervision.

There was also the suspicion that there was a bit of behavioral response by employers. In principle the jobs were meant to be new ones, but in practice a job that would have had to be done anyway could be charged to the public purse. Within the central government the scheme became a means of getting around funding controls; within local government it became a subsidy on the rates; within farming it became a cheap source of investment funds (the most likely employee was a son who would one day inherit from the farm); in a business the scheme could be used to enhance profits.

A particular problem was that the unemployed tended to be the young flowing onto the labour market from school. Under stressless unemployment conditions, they would obtain a job, presumably do some useful work, get inculcated into work habits, and obtain on the job work skills (and sometimes get a qualification). Ultimately they became useful members of the workforce, or at least that is what they tell you today in their retirement.

There had been an unintended consequence of this. Obtaining formal qualifications were not a priority for many workers. The university system was there, but the vocational training system was primitive. (A national network of polytechnics was only established in the early 1970s. Previously the emphasis had been on apprenticeships and obtaining skilled workers by immigration.) The problem was recognized, but remedies involved government spending, and an interest by the young and others in obtaining a qualification.

The result was that New Zealand steadily drifted behind other rich countries in terms of the qualification level of its workforce. An OECD study found that in 1992, some 49 percent of New Zealanders in the 55 to 64 age group had an upper secondary education or better, which put the country at 7th out of 21 surveyed and just above the OECD average. But among the 25 to 34 years olds, the incidence was 60 percent, and New Zealand was 13th equal, well below the OECD average of 72 percent. No other country in the survey had made so little improvement across the generations. (1) In effect educational attainment was standing still in New Zealand, while the rest of the world passed it by.


It was not simply that the world was changing, but New Zealand was not. Indeed the New Zealand economy changed its degree of external diversification faster than any other OECD. (2) It is easy to say it had to, given that the falling pastoral terms of trade meant that traditional exports were no longer as profitable, and alternatives had to be found. Nonetheless with hindsight we might marvel at the achievement.

In the first part of the postwar era New Zealand really only exported pastoral products, mainly to Britain, with some wool going to the European continent, and beef to the US. The collapse in pastoral prices meant that new products and markets had to be sought. Pastoral farmers tried to diversify extending into deer and goats, but that was marginal. (There had been a big switch into beef in the early 1970s, but prices dropped there too.) The big gains were when they switched out of pasture altogether, especially into horticultural products (most notably kiwifruit) and forestry. There was further processing of the pastoral products, getting the profit from the value added after the farm gate, and new destinations were found. (Today Britain is a minor market, behind Australia, greater China, Japan, South Korea and the USA.) General manufactures were sent overseas for the first time (especially to Australia), as were energy imbedded products such as aluminium and methanol. Fish are a significant export, while tourism is now the single biggest export industry.

The extraordinary thing was this diversification was not that conscious. Certainly visionaries like Bill Sutch talked about it and promoted it in the early 1960s. But generally the outcome was the result of individual New Zealanders and their businesses responding to the market signals, with the substantial assistance of government.

Because the successful diversification was largely unconscious, in the sense of not being driven by any national vision, its implications were not thought through. It is true that the planning exercises of the late 1960s and the early 1970s, arising out of the National Development Conference, had some diversification built into them to a more or less explicit degree. But they remained dominated by the pastoral sector, and the quantitative projections based on aggregation meant that the structural implications were not worked through. In the late 1970s there was established a New Zealand Planning Council, which was most noteworthy for its lack of foresight. Beholden to various pressure groups from the past and cranky theories, it was never able to look forward.

Thus while the external sector diversified, there was insufficient effort put into adapting the economy internally. Most of this story belongs elsewhere, but the failure partly explains the revolutionary reforms of the 1980s. (3) The task here is to tell the story in regard to the welfare state.

The Welfare State in the 1970s

Much of the story has been presaged in Chapter 1. The success of the welfare state of the first part of the postwar era depended upon the peculiar economic structure of those years, in which high pastoral export prices, were used – via protection and other interventions – to maintain full employment. This was possible without damaging the effectiveness of the export/pastoral sector providing the mechanisms transferred only the land rents and did not distort productive decisions.

However once those pastoral prices fell (relative to other prices), the land rents diminished, and there was less to transfer. Moreover the resulting diversification mean that the simple mechanisms which had been designed to transfer from one industry, pastoral farming (or a closely related group of industries – sheep, beef cattle, and dairying) could not be targeted on an enormous variety of industries – pastoral farming, horticulture, forestry, fishing, further processing, general manufactures, energy based exports, tourism, and so on. Thus the ability to use the traditional policy instruments which maintained full employment had been lost.

Part of the problem is that in the new economy almost all industries are involved in exporting. It is not just the ones that do it directly. Those industries which are inputs into the direct exporters also become involved. Meanwhile, that New Zealand is exporting to a country puts almost irresistible pressure on it to liberalize its border protection to allow the export destination equivalent opportunities in New Zealand.

This pattern of domestic industry which because it supplied exporters, or industries competing against imports, applied elsewhere. There were increasing restraints on the ability to raise costs, by overmanning to absorb surplus workers, or to subsidize the industries from taxation. For taxation is also frequently a cost to a producer.

The End of Full (Stressless) Employment

Thus the mechanisms to generate jobs by government intervention became obsolete. Certainly it is possible to create jobs in industry X by border protection (so there is no competition from imports), or by subsidies. But increasingly such a strategy meant jobs in industries Y and Z, were handicapped by the additional costs for their tariff protected inputs or by more burdensome taxation. (This need not always happens. There are economists who say it always does, but their models – the logic which underlies their arguments – require very tight and unrealistic assumptions about reality. All we need here for the argument is that the situations when such interventions would work were drastically reduced following the diversification.)

That was not the only fundamental change in the labour market. Consider three factories in the same town, one producing timber, one packaged dairy food, and the third produced a household durable. Suppose they are all supplying a local market, protected from overseas competition. The industrial relations and pay rates for the three firms could be much the same and, indeed, much the same as for similar factories in another part of the country. Now suppose, following the diversification, the timber is going to Japan, the dairy food to Thailand, and the durables to Australia. Each firm will have a whole range of problems specific to it, arising out of its different markets and marketing conditions. Inevitably this will affect industrial relations within the firm. There will remain commonalities, but faced by the diverse requirements of exporting each firm will want to adapt its working conditions for its specific markets. (4)

Not only did the external diversification result in firms having different industrial needs, but the world of an exporter (or supplier to an exporter) is much more dynamic than that of the firm in a protected domestic market. The three firms mentioned in the previous paragraph may all be experiencing different stages in the market cycle. Australia might be stagnating, Japan booming, and the Thai dairy market under pressure from an alternative (say European) supplier. On top of the cycle there may be structural change. The durable may be at the end of its market life, the wood may be being substituted for some other product (say aluminium), while Thai households may be entering the income range where the increase consumption of dairy products markedly. The permutations are endless, but the practicality is that no worker in an export, import competing, or input supplying firm can be guaranteed a job for life. Meanwhile increasing technological complexity means that even the job itself is under continual change.

The next chapter looks at social change, and argues that it compounded the difficulties of the 1970s and beyond. But the social change could have been more readily coped with, had the economy remained in its pre-diversification state with the favourable pastoral terms and substantial land rents). The funds would have been available to `buy off’ the pressures of social change. But with rising unemployment and reduced opportunities for traditional intervention, they were not there.

Next Chapter Ch 6: Gender in the Welfare State

1. OECD ((1996:28).
2. Gould (1985), and B.H. Easton, In Stormy Seas (1997).
3. For instance see B.H. Easton, In Stormy Seas (1997).
4. The argument is elaborated in the appendix to chapter 7 of B.H. Easton, The Commercialisation of New Zealand. (1977)