Chapter 9: The Internationalization Of the New Zealand Economy

A chapter of Globalisation and Welfare State

Keywords:Globalisation & Trade;

The glacial shift to a fully market economy before 1984, was obscured by the draconian wage and price freeze form 1982 to 1984. It is important that it is noticed, for while the transformation after 1984 was faster, extremist, and ideologically driven, it was not a merely a political fashion. The external diversification of the 1970s was impacting back on the domestic economy. Before 1966 the economy had almost a dual structure in which the pastoral export sector and its suppliers were almost independent of the domestic sector. The connection was that the consumers dependent upon the incomes from exporting, were forced by imports, tariffs, and other interventions to give preference to domestically produced goods and services. (This enabled foreign exchange – in effect real incomes – to be transferred to the domestic sector and made average incomes of the two sectors more equal.) (1)

After 1966 the distinction became increasingly difficult to maintain across the entire economy. Certainly individual firms and localities could claim the continuation of their particular protection, and often did with vehemence. but it became impossible to maintain the protection of every firm and every locality, although prime minister Robert Muldoon tried hard.

There was no single source of the pressures which forced the market liberalization. Typically they proceeded from specific problems of an exporter, but each retreat from control created flow on pressures. Perhaps the most spectacular was the financial sector liberalization, which was driven by dealing with the monetary consequences of the high inflation as well as the technological and international developments (which are discussed in greater detail in Chapter 10), as well as the diversification. As the number of exporters increased and export (and imports) destinations increased the foreign exchange (FX) dealing requirements became more complex. Under the pre-1966 arrangements, the trading banks were given exclusive rights to be dealers. By 1982 exporters, requiring increasingly complex deals and concerned about the size of the FX margins (that the dealer takes between what the FX costs to buy and what it sell it for), demanded greater competition. The government responded by making FX dealer licences available to any reputable financial institution. This is called “quality licensing”, where anyone who meets a quality standard may enter the industry, as opposed to “quantity licensing” where the number of licenses are fixed. (The most obvious place where this happened, subsequently, was over taxi licences, where justa bout anyone without a criminal record can obtain license.) (2) The flow ons were complicated.

A number of financial institutions that were not trading banks entered the FX market. There are about a dozen outstanding licences, although interestingly there remain four major dealers corresponding to the four trading banks. the point is if they were to raise their prices too high, or to provide an inadequate service, the fringe players would increase their market share. This is a good example of the notion of “contestability” where a market is regulated not so much by competition, but by the threat of competition from new market entrants. Unfortunately not all markets can be so regulated, because the potential entrants have to be able to enter and leave the market easily. (3) FX margins did fall, as would be expected, but it proved that the super-profits that the bank were making from the high margins been used to subsidize the management of cheque accounts whose charges to users were under price control. Today most people pay the full cost of managing their bank accounts.

However probably the most bizarre flow on, occurred during the election of 1984, when there was a `run on the currency’, in which New Zealanders were purchasing FX from the Reserve Bank to the point it was in danger of running out of FX reserves. In the old days the Muldoon would ring up the handful of dealers and tell them in no uncertain terms that a raft of regulations that would make life very difficult would descend upon them if they did not discourage the FX purchase. Admittedly Muldoon was losing his authority, but it is much more difficult to ring around a dozen FX dealers, especially when each would explain that they were only responding to market pressures. There is a sense that the monetary liberalization of the 1970s and early 1980s led to the ending of the fixed exchange rate regime (although that does not mean that the particular solution of a full float was pre-ordained).

Sometimes the external pressures impacted deep into domestic arrangements. (4) A consequence of the exporting to Australia, was the reciprocal opportunities to them under CER. This meant that no longer would Australian canned fruit exports could be excluded, which had considerable implications for Watties, New Zealand’s largest producer of canned fruit. Because of the competitive threat, they looked to reduce their costs. One source was that they were required to use the railways to freight their cans, although that was less efficient than road. In the past they had been able to tolerate the higher costs, because they could be passed onto the consumer, but their Australian competitors would ship into the Auckland market, and so did not suffer from this handicap. When Watties went to a tribunal to get an exemption from the requirement to send by train, they were turned down because of the law. So the law was changed, and the railways’ special protection was removed. The inevitable consequence was that New Zealand Rail had to lay off considerable numbers of workers, many of whom became unemployed.

Sometimes the impact was erratic and unpredictable. As a part of the Tokyo round of trade negotiations New Zealand agreed to remove import controls on strong beer in 1980.(5) The quid pro quo was that New Zealand regained access for cheese to the European market. However the big impact in early 1980 was not European strong beers (which were always going to be expensive for special niche markets). Instead Australian imports flooded in, so much so they threatened the viability of the brewery at Hasting which specialized in canned beer. The story gets complicated at this stage, and we shall follow only one thread. Part of the New Zealand competitiveness was that it was using steel rather than aluminium cans, which could not be imported into New Zealand because of import controls. (You might say the Australian breweries were smuggling in aluminium cans wrapped up in strong beer.) New Zealand’s concentration on steel cans was to support the steel mill at Glenbrook. The steel mill claimed one reason for their protection was they were paying too much for Huntly coal, they could import their requirements cheaper from Australia. But State Coal explained they needed import controls so they could over charge for the Huntly Coal to cover the costs of the west Coast mines which were running at a loss. Thus we have a story which involves Taranaki dairy farmers and cheese makers, Hastings brewery workers, Auckland steel workers, and Huntly and West Coast coal miners.

The subsidization and cross-subsidization had got to the point that almost everyone could be involved, and no one knew who. How could anyone decide which of these activities were in New Zealand’s best interests and which would have to be closed down, since the trading regime did not allow them all? (To add to the complexity, New Zealanders acquired a taste for strong beer partly – presumably as a result of the imports, the New Zealand breweries responded with their own which they now export.

One answer as the status quo. Jobs that were there were to be protected at whatever cost. Leaving aside whether this was economically wise (since the efficiency losses could be possibly be horrendous), it was not practical, because domestically there was constant flux. Were West Coast miners to be employed after the coal had run out; were banks committed to all their branches staffed at current levels even if the population shifted, while information technology promised efficiency gains albeit with reduced labour. (And in any case, how could the banks continue their traditional staffing arrangements, which depended on a high turnover from married women resigning to have children, when patterns of marriage and childbirth changed?)

By 1981 the Department of Trade and Industry, the government agency, which had been charged with making such decisions on behalf of the government (because that was the effect of the interventions), lost confidence in its ability to do so. In the slogans of the day, `they could not pick winners’.

The (extreme) alternative was to leave the market to make the decisions., to pick the winners, or if it backed the wrong horses the punters who put up the money lost their shirts, not the government. (This is only a first round effect, for if the investors lose their money the government loses the tax the successful enterprise would have paid, and may have additional costs as a result of the additional employment. Thus the government does have an interest in quality investment decisions. At issue is the best contribution to it making those decisions.)

A major difficult of the New Zealand economy is that it is so small, that for many key activities there is room for only one or at best a handful of suppliers. Thus New Zealand industry was likely to be monopolistic or at least oligopolistic (a few suppliers), rather than competitive. At this point the economics gets messy and fractious. For instance chicago aligned economists, of which there were many in prominent positions in New Zealand at the time, would argue that there was no reason to intervene if the monopoly was the result of private activity rather than a public intervention.(6) A more sensible approach was to encourage competition by abandoning restrictions to entry into the industry, in the hope that this would induce `contestability’ if not competition. One of the main barriers to entry arose from border constraints such as tariffs and import controls. And so they were ruthlessly removed.

If one believes this (we discuss the reservations below), the government can withdraw internal interventions, such as price controls, because the no longer protected industry, open to competition, would be regulated by the market. Indeed because price controls could never be so precisely applied, it was argued that they could inhibit a business’s competitive response (say, by limiting the ability of the firm to set prices to repel competitors).

The case for abandoning border controls in order o regulate domestic markets by competition was reinforced by the case for international `free’ trade. This case is made with an extraordinary passion by many economists. I have never been quite sure why. It is possible that the formal proofs of the gains from trade are at the limits of most economists’ mathematical competence, and having struggle this far they cling to the result with a tenacity reflecting their gratitude at attaining the insight. In fact it is easy to sketch a proof, which while not rigorous, captures the central idea.

No one, as far as I know, argues that a household should be self sufficient, or produce all the goods and services it can. It seems sensible and natural (and efficient) to earn market income and purchase products from outside the household even if the household can make them. For instance most cooks can bake bread and brew their own beer. some do as a hobby. Nevertheless most households buy their bread and beer from outside suppliers. The same applies to regions. There is no common sense in every region producing its own cars. In many (most) cases it make sense better to buy them from elsewhere. surely the same logic applies to nations. Just because one can do something, it does not mean the household, region, or nation should do it.

Of course one may want to understand why this happens, and the formal economic analysis provides some insights. For me the interest is not why the obvious should happen – why should households, regions, and nations free trade – but under what circumstances they should not. It is the analysis which takes place after the level at which most economists seem exhausted which intrigues me.

As it happens there are many situations in which the free trade theorems do not apply, and some, such as where there are economies of scale or monopolies, are important in the practical world. As it happens the most important is easily illustrated by using the household example again. Under what circumstances might a family start producing something which previously they had purchased outside the household? One situation is where there is a loss of income, when the family will cook more of its own food rather than eating outside, make their own clothes, find their own entertainment walk rather than take the bus, and so on. If the family is facing unemployment, it makes sense to do things at home which they would not do if there was full employment. The formal theory which favours free trade requires full employment too. So if there is not full employment, then the standard case for free trade falls over.

Note this is not equivalent to the argument that constrained trade or protection is necessary to generate full employment, although there are economists, most notably wolf Rosenberg (7) in New Zealand who draw this conclusion. It is true that the there is an apparent correlation between the rising unemployment the New Zealand economy has experienced, and the implementation of internationalisation policies, which reduced and eliminated border protection. But I do not think this is fundamentally a causal relationship. Rather then pressures which drove the economic (and social) diversification and the policy responses were also the pressures which generated the unemployment.

In order not to be misunderstood, or to be accused of equivocating, in my view the protection regime from the 1960s was too high and too erratic, and there were economic gains to be obtained from lowering it, related to the reasons I described earlier. I accept that a consequence of the reductions were unemployment which should have led to redeployment (a phenomenon of which I shall have more to say below). The redeployment did not happen, or did not enough, largely in my view because of a gross failure of macroeconomic management.(8) It does not follow from this I necessarily support the elimination of all protection, now that it is low and more even. There are two broad practical reasons for moderate levels of protection. The first in regard to existing industries results from the long term gains from elimination being small, relative to the costs of redeployment which may be high (especially if there is significant unemployment or the firm is important in the region). For new firms or industries, protections may be a policy instrument to get the business started (although I would probably use this rarely). Typically the case there would have to be special circumstances such as economies of scale, monopoly, or unemployment (or perhaps rapid technological change).

At this stage my musings are not nearly so important as that, whatever the reasons, the New Zealand economy was opened up to international competition and penetration, by reducing and eliminating import controls, tariffs, and a host of other controls which discriminated against foreign production and ownership. It is not relevant for our purposes here that, as I have argued elsewhere,(9) that the internationalisation policies were driven by an extremist ideology. Even if there had been a government of moderation, the internationalisation of the New Zealand economy would have happened.

Consequentially unless there is a change to New Zealand’s political economy, of the underlying resource base patterns of production and ownership and overseas demand, the New Zealand economy will remain open to global market forces. It is possible that protection could be moderately raised, especially for a particular sector, but the fortress New Zealand that was introduced in 1938 and maintained for the following four decades, is not a viable policy option. This will not stop special interest groups pressing for border protection for themselves, and even on occasions attaining some, and there may also be classes of protection justified for sanitary and hygiene reasons or for culture (discussed in chapter 15).

It is instructive that the Manufacturers Association, once the great bastion of border protection, as almost totally eschewed it. Once the entire sector depended upon restrictions for their survival. With the diversification some manufacturers began exporting, sometimes finding that domestic protection on their inputs were a handicap, while free trade arrangements (e.g. CER, APEC) involved their abandoning their support for domestic producers in exchange for getting better access to the foreign partner. (In addition for reasons of public policy, lower and zero protection was introduced for South Pacific nations (SPARTECA) and the poorest in the Third World (GSP).) This initially minority manufacturing lobby became increasingly important as their exporting expanded while the domestic economy was stagnant, and as reductions in import restrictions eliminated traditional domestic market directed and protected firms. The effect was reinforced by foreign owned firms which wanted to rationalize production, and were happy to source offshore. Eventually the latter became the rump and a sort of macho commitment to exporting at the neglect of domestic markets prevailed.

But even were there a change of attitude, it is difficult to envisage how a comprehensive protection regime could be instigated. Today much foreign exchange is spent on services: the issue of whether to holiday in Korea rather than Nelson is as important as whether to have ones car sourced from one of those two destinations. Even a regime over goods is difficult to enforce. Tourist can purchase goods overseas which they may or may not declare, while in some areas there are now internet shops.

Because of the macroeconomic mismanagement which accompanied it, New Zealanders had a bad experience internationalization in the 1980s, and they are likely to feel much happier about the globalization experience of the 1990s. But neither can be significantly reversed, at least under current and likely circumstances. An important consequence is that the labour market is likely to remain dynamic.

Recall that there was a conscious program of closing down firms in the 1980s. It was not a matter of a politician or official wandering around, identifying the precise firms which their policies intended to close. Rather the inevitable outcome of the reduction of interventions was that jobs would be lost and plants be closed down. Those who wee honest comforted themselves that while there would be unemployment, it was really redeployment, as the released resources (of which labour was the most important) would find new opportunities. To some extent that happened, but insufficiently, so that unemployment and not-in-the-labour force rose.

While this is a matter of the past, this process of employment to unemployment to redeployment is not likely to slacken. Of course it has been a feature of industrial society, although sometimes in the past the employment to redeployment process went without an unemployment phase, as when there was internal retraining and transfer within the firm. However technology and fashion appear to be changing more dramatically today and are likely to in the future, so the process is going to happen more often and be more complex. Internationalisation reinforces this, since it opens up most New Zealand firms to the dynamics and pressures of the world (while globalization increases those dynamics and pressures). The job for life – if it ever existed, it certainly did not for many women – ended in the 1980s and is not going to be a significant part of the labour market of the future.

Next Chapter Ch 10: Entitlement and Taxation

1. See Easton In Stormy Seas.
2. Keenan (1985).
3. See Bollard & Easton (1985) for a description and further examples.
4. Easton & Marks (1983).
5. O’Dea (1985).
6. An example of the debate is covered in Easton `From Reaganomics to Rogernomics’ (1989), p.74-77.
7. Rosenberg (1995), and Easton Prescription or Poison?.
8. See Easton, In Stormy Seas.
9. Easton The Commercialisation of New Zealand.