Muldoon’s Mark

Listener 16 September, 2000

Keywords: Political Economy & History;

Barry Gustafson’s comprehensive biography of Rob Muldoon was launched in the same week that the New Zealand exchange rate sunk to a record low against the US dollar. Had Muldoon been alive he would have predicted the collapse (although not its exact date), and he would be predicting further turbulence on the world financial markets (as he did before the 1987 sharemarket crash). Of course Muldoon got a lot of things wrong, but his single biggest prediction proved far too correct. He resisted the advice to liberalise the New Zealand economy other than at a cautious pace, because he said it would not work and it would damage people.

He had some understanding of why the economy had been in difficulties in the 1967 to 1984 period. The wool price collapse in late 1966, compounded by the turbulence in world financial and commodity markets afterwards, meant that New Zealand suffered from a major change to its external environment. The ideological who saw the solution as economic liberalisation missed the point, for they overlooked the external shock, and took measures which damaged the external sector.

In the 16 years since Muldoon left the finance portfolio, New Zealand’s export revenue has trebled in nominal terms, while net debt servicing has increased by a factor of six times. We have been increasingly acquiring foreign exchange by borrowing rather than selling. Anyone who thinks the world will see this as a sustainable strategy must be a financial sector commentator or a journalist parroting them. When the foreign investors saw through the hype, they reduced lending to New Zealand, and the exchange rate fell as it has been doing steadily since early 1999 eventually plummeting to a new low.

In the 1970s I supported a somewhat faster economic liberalisation than Muldoon did (and unlike some of his latter day critics, I said so publicly at the time). But for me, and for Muldoon, that had to be accompanied by strong growth in the external sector. That was the point of the 1979 budget which may have been his greatest economic achievement (although it could have been better). The outcome was New Zealand began growing faster than the rest of the world, as John Gould observed in his 1985 book, The Muldoon Years (overlooked because it does not conform to the official ideology). And then Muldoon’s successors took over, and their policies damaged the external sector.

They had some luck. Some of Muldoon’s export schemes came on stream after 1984, and there was an export price boom in the early 1990s which gave the temporary impression of a recovery. Meanwhile we went on a borrowing spree.

The Government seems to have been trying to address the problem, by trying to stimulate the export sector (including letting the exchange rate fall, which makes exporting more profitable and putting in a pro-export industrial assistance package). However, the external sector has suffered from 16 years of neglect, and it needs time. Much – particularly the biologically based exports cannot be wound up over night. Exporting is a long-term business of building up production capacity and developing overseas markets and distribution networks.

In the interim we must suffer the downside of higher inflation, without any immediate prospects of an additional economic expansion. (Indeed the domestic sector may begin to contract.) Whatever the pyrotechnics of the shifts in the New Zealand dollar, and the hysteria it engenders among commentators, for most people the real effects are both complicated and long term, although many will be evident by the end of the year. However the outburst of price rises will be earlier. Key elements for success will be the wage path, the fiscal and Reserve Bank response, and what businesses and consumers do. (I’ll keep you posted.)

Of course there will be ‘experts’ far more certain than I about our future – notably those who have got the last sixteen years wrong. To evaluate their prognoses, ask when they first predicted that there would be a dollar plunge. For too many the answer is ‘the day after it happened.’ As Gustafson’s book shows, Muldoon would have done better.