What Happened to the Nation Building State in New Zealand?

Paper for the New Zealand & Australian Studies section of the Conference of the Western Social Sciences Association, April 21-24 1999, Fort Worth, Texas.

Keywords: History of Ideas, Methodology & Philosophy;

Brent McClintock’s “Gordon Coates and the Nation-Building State: 1920-1935”, which precedes this paper, also sets its stage. [1] In the interwar period there arose a group of New Zealanders who were committed to use the instruments of the state to build a New Zealand nation distinctive and independent (as much as it could be). Coates may have been the earliest, but numerous other New Zealanders in politics, the public service, corporations, and cultural life also participated. Most are recognized in The Dictionary of New Zealand Biography and many have full biographies published or in the process of being written: politicians Peter Fraser, Apirana Ngata, and Walter Nash (as well as Coates); public servants Clarence Beeby, Joe Heenan, Alistair McIntosh, Douglas Robb, and Bill Sutch; businessmen James Fletcher and James Wattie; writer Rex Fairburn and Frank Sargeson (with prominent artists coming a little later). Even so, acknowledging such great totara trees but locates the bush over which they towered: that bush below was dense with others equally committed to the nation building state. Curiously, there are no obvious women for the list. The tallest was Te Puea, but her vision was to build the Tainui nation.

The influence of most of these men continued through the war, and well into the post-war era. They had successors, some of whom grew to totara of comparable height. Nation building was a central part of the political agenda through to the early 1980s. There is not the place to detail the story, but the strength of nation building might be illustrated by Robert Muldoon’s “Think Big” energy industrialisation strategy which was intended to use the energy surplus that developed in the late 1970s to make New Zealand a significant player in the world energy: an ambition which failed, but here is a useful illustration of the persistence of the nation building vision.

This papers focus is on economic policy, and in particular the dramatic collapse of the nation building vision in the 1980s. This collapse did not necessarily occur in other fields. New Zealand’s commitment to a nuclear free territory was a continuation of a theme of an independent foreign policy which goes back to the 1930s nation builders who challenged the Italian invasion of Abyssinia in 1938 and made significant contributions to the development of the United Nations immediately after the war. The arts flourish, and while their practitioners take a vigorous interest in overseas developments, none of the greatest trees could be said to suffer a cultural cringe, even though they win international recognition.

The decisive change in economic direction – of the conception of what constitutes a national economy – could be demonstrated by listing various policies which had the effect of reducing New Zealand’s national economic autonomy – the effective abolition of foreign investment controls, border protection, and preferences for New Zealand businesses, and the selling of state owned businesses to foreign companies. There is not a comprehensive study of the degree of foreign economic protection but two statistics will illustrate the transformation. In the 1984 March year the difference between GDP and GNP, which is the part of total production which goes to foreigners was 3.7 percent of GDP. By the March 1997 year this proportion had risen to 8.0 percent, or more than double. [2] Secondly, the New Zealand Business Roundtable, the peak powerful organization for big business and the most vociferous exponent of the new economic policies, shifted from a group of chief executives of mainly New Zealand owned businesses (which were producing enterprises) in the late 1970s when it was founded, to members who are mainly CEOs of foreign owned companies today (and which are mainly financial enterprises).

The turn around is all the more puzzling because it was made by the fourth Labour government (1984-1990) whose predecessor first Labour government (1935-1949) bedded in the economic nation building which Coates was an exponent. Not that nation building was a solely left wing activity. While there is dispute where Coates is located on the political spectrum, the first great secretary of the modern Treasury, Bernard Ashwin, was undoubtedly a political conservative. Yet as Secretary, he was actively involved in the founding of the Tasman Pulp and Paper Company in the 1950s, which might be thought of as a (successful) precursor to “Think Big”, retiring from the Treasury secretaryship (he served from 1939 to 1955) to play a major role in the company. After retirement he objected strongly to the National Government’s sale of its interest in British Petroleum (NZ) in 1955 for essentially nation building reasons. [3,4]

Instructively too, while the Australian Labour Government (1983-1995) was pursuing similar policies if more moderately, one gets no sense of their betraying their commitment to Australian nation building to the same extent. (A more extensive version of this parer would illustrate the vision was widespread in the post-war era, especially among ex-colonies. What appears is unusual is that few – perhaps no other – retreated from the nation building vision as much as New Zealand did.)

It could be argued that the Labour leadership of the 1980s was as committed to nation building as its predecessors, but it ventured unknowingly down an economic policy strategy, which had the unforeseen consequence of undermining nation building. It is true that some of the Labour leaders maintained the rhetoric of nationalism, but it was largely in non-economic contexts. Rarely was national interest invoked in economic policy, other than in the platitudinous rhetoric that the changes would benefit all New Zealanders. (They did not.) That may be the key in economic policy terms. The intellectual foundations of the economic liberalisation which Labour adopted, largely on the advice of its public servants, was based on the (right wing version of the) standard economic model which had been primarily developed by US based economists. [5,6] While purporting to be a general model of all economies, it is riddled with assumptions which are peculiarly American, and which do not readily apply to New Zealand. It assumes that individual markets are generally large enough so economies of scale are unimportant and there are sufficient actual and potential firms to make each market competitive for practical purposes. It assumes that the national economy is a significant proportion of the international economy, and so is not subject to the external financial, price and political shocks that a small open economy such as New Zealand regularly experiences. It ignores that public choice theory, while purporting to be general, reflects the institutional political arrangements of the United States with its large population, its federal structure, its separation of powers although, ironically, the political strategy the New Zealand reformers used to implement their policies would be have been impossible in the US because of the very different political arrangements.

It would be easy to explain the use of the inappropriate model as intellectual laziness, grabbing the most readily available from the shelf, without considering its relevance to the local situation. Phillida Bunkle, currently an Alliance MP, has a more fundamental explanation.

… I met a large number of them [the future reformers] in the United States. They’re baby boomers, and they returned to this country with a vision that was very much gained from graduate school in the United States. They came home with a cosmopolitan[‘s] view of New Zealand. They were going to transform this society. Now they thought they had 1960’s student values, but they actually were very impressed by North America and its consumerism and its choice and civil rights and all that. They came back with that liberalized kind of vision. But it was also I think that they had a kind of sense of embarrassment about what a hick little place they had come from. They were in Chicago, they were in New York, they were in Harvard, and they were very aware that they came from `Hicksville’. And part of it was their awareness that they were products of the welfare state because what the welfare state does in New Zealand is bring in social uniformity. It is deeply egalitarian. People end up having the same social services. They were not very sophisticated. and what they were going to do – they were going to bring us into the global village. They were going to bring MacDonalds and all these wonderful slick things and transform `Hicksville’ into a sort of social paradise of the sort you would dream of in Cambridge, Massachusetts in 1968. [7]

Before discussing where this inferiority complex (the Australians call it a “cultural cringe”) it is worth taking the story of the reforms a little further. In terms of their overt objectives – better economic performance – the reforms failed miserably (other than in the squeezing out of inflation). [8] Table 1, which compares the performance of the New Zealand economy between 1985 and 1998 to Australia and Ireland, and to the OECD average demonstrates the unimpressive performance of New Zealand (other than in price stability) in the post-liberalisation period. Any shorter period, providing it is cyclically adjusted, gives the same picture, as do all the authoritative projections/predictions of future performance. The optimistic ones suggest the New Zealand economy will grow at the same rate as the OECD (but from a base lowered by the reforms) while continuing to depend upon an unsustainable current account deficit, financed by a private capital inflow. Advocates of the reforms, who only a few years ago were enthusiasts (typically after confusing a strong cyclical upswing following an exceptionally long contraction with a new secular growth trend) are today either bewildered or, at best, promising significant benefits some time into the future.

There are still a few who think the reforms succeeded, but typically their criteria is that the reforms were implemented, rather than the economic outcomes are better. Overseas, there are those who advocate liberalisation policies and use New Zealand as an example of the success of the policies they advocate. But they do not evaluate the outcomes either. (There is an odd symbiosis between them and the New Zealand reformers. Because of their inferiority complex, the latter require the plaudits of overseas commentators – I have seen them respond to praise from good, or even mediocre, “overseas experts” like puppies having their tummies tickled. So each group has an incentive to misrepresent the true situation to the other, and neither has an incentive to carry out a proper scientific examination.)

In one unspoken sense the reforms succeeded for they put a new elite in charge of the economy. In a just published, and very important, book Only their Purpose is Mad, Bruce Jesson calls this the “financial transformation” because the elite is now characterized by being business people primarily interested in financing rather than production. [9] We observed this earlier in the transformation of membership of the Business Roundtable. The transformation occurred partly because the reforms implicitly assumed that finance was at the core of economic decision making. But perhaps even more important, the resulting economic failure, coupled with the globalisation of the world financial system that was occurring at the same time, meant that there has been substantial capital inflows into the New Zealand since the liberalisation of the external capital account at end December 1984. Much of this has involved the purchase of equity in New Zealand businesses, including those sold by the government of New Zealand. Thus the financial community’s main function is to manage the finances of overseas investors.

Jesson is critical of the competence of many of the financiers. But in addition, and more fundamentally, he argues that they lack a sense of the history and culture of the land in which they live. This cannot have arisen simply from a failure of New Zealand to articulate such matters to its people. The vitality of the local artistic community is evidence enough that they have absorbed that culture, and used it powerfully in their creative activity. But the confidence of the New Zealand arts community to be able to do their own thing, and yet be of international standing, did not carry over to the modern policy community and the business community which benefited from the policies. Perhaps the failure begins with the dominance in New Zealand business schools of overseas staff, most of whom are not good enough to get comparable positions in their home countries. New Zealand business, economic, or financial graduates are thus poorly educated in the basics of their own history, culture and economy. From the beginning New Zealand is treated as something inferior, not conforming to the overseas model which is being taught as some ultimate truth. Thus the New Zealanders end up with the inferiority complex that Bunkle identified. Nation building policies got abandoned because they had no commitment to the nation in which they lived, and which nurtured them. Instead, they clung to some idealised model of very different economy, of which the United States economy is the closest living example.

Today the New Zealand business elite – the financial community – are but subordinates of overseas interests. The abandonment of nation building has strengthened the neocolonial status of New Zealand, exactly as Coates and his generation of nation builders feared. Recovering a significant nation building element in New Zealand economic policy, will not be easy, given the burden of foreign liabilities which dominate the nation’s balance sheet, and a continuing cultural cringe among the elite.

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Notes
[1] B. McClintock, “Gordon Coates and the Nation-Building State: 1920-1935” (Economic Department, Carthage College, 1999).
[2] This excludes retained profits of foreign owned firms. The SNA treats their profits as domestic income (since foreign owned corporations are legally local entities) until the profits are remitted. Thus the true proportions (i.e. are even higher, and probably the increase over the period is even greater.
[3] B.H. Easton, “Bernard Ashwin: Secretary to the Nation Building State”, New Zealand Studies, November 1997, p.13-21.
[4] B.H. Easton, “Ashwin, Bernard Carl 1896-1975,” Dictionary of New Zealand Biography: Vol 4, (AUP, 1998) p.21-22.
[5] B.H. Easton, “From Reaganomics to Rogernomics”, in A.E.Bollard (ed) The Influence of American Economics on New Zealand Thinking and Policy (NZ-US Educational Foundation & NZ Institute of Economic Research Monograph 42, Wellington, 1989) p.69-95.
[6] B.H. Easton, The Commercialisation of New Zealand (Auckland University Press. 1997)

[7] CBC Ideas program, “The Remaking of New Zealand” (first broadcast on October 1994).
[8] B.H. Easton, In Stormy Seas: The Post-War New Zealand Economy (Otago University Press, 1997).
[9] B. Jesson, Only Their Purpose is Mad (Dunmore Press, 1999).

Table 1 ECONOMIC PERFORMANCE: 1985-1998

NZ Aust Ireland OECD
Inflation Private Consumption Deflator (%p.a.)
1985 17.3 6.7 5.0 6.9
1998 1.3 1.9 2.7 3.3
Average
85-98
4.6 4.1 2.6 5.5
Inflation GDP Deflator (%p.a.)
Average
85-98
4.5 3.9 2.7 5.4
Unemployment (% of Labour Force)
1986 4.0 8.1 16.8 7.1
1998 8.2 8.1 8.9 6.5
Average
86-98
7.2 8.6 12.9 6.6
Employment Growth (%p.a.)
Average
85-98
0.8 1.9 2.2 1.2
GDP Volume Growth (%p.a.)
Average
85-98
1.7 3.1 6.0 2.7
Labour Productivity Growth (%p.a.)
Average
85-98
0.9 1.2 3.8 1.5
Export Price Change (%p.a.)
Average
85-98
1.4 0.2 0.5 1.0
Import Price Change (%p.a.)
Average
85-98
0.5 2.3 0.7 0.5
Terms of Trade Change %p.a.
Average
85-98
0.9 -2.1 -0.3 0.5
Export Volume Growth (%p.a.)
Average
85-98
3.9 7.1 11.7 6.9
Import Volume Growth (%p.a.)
Average
85-98
5.3 6.6 9.8 7.2
Current Account Deficit (% GDP)
Average
85-98
3.7 4.8 -0.8 0.2

OECD Economic Outlook (December 1998). The New Zealand figures do not always correspond to the official figures, but are used here for consistency. The OECD consists of 28 economies. The 1998 data is estimated.
* G7 for unemployment.

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