Remaking New Zealand and Australian Economic Policy by Shaun Goldfinch

New Zealand Books August 2001, p.8-9.

Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History;

Shaun Goldfinch’s Remaking New Zealand and Australian Policy: Ideas, Institutions, and Policy Communities is the latest version of what is becoming the standard account of the origins, implementation, and outcomes of the economic changes of the 1980s and 1990s. It goes something like this.

In 1984 the New Zealand economy was suffering from a sort of scelrosis in its economic mechanisms, arising from the unwillingness of the Prime Minister and Minister of Finance of the times, Rob Muldoon, to respond to the social and economic changes which New Zealand had experienced in the 1970s, and the tight interlocking of the various pressure groups protecting their interests. The external sector had experienced rapid diversification – greater than any other in the OECD country – which was impacting on the internal organisation of the economy too, as was some technological change (but as not as much as happened in the 1990s from telecommunications). In parallel to the economic change there was an increasing social heterogeneity as various groups which had largely been ignored in the past – such as women, Maori and other ethnic groups – became more prominent and demanding of a proper role in their society.

The ‘rogernomic’ economic polices introduced by the Labour Government which came into power in 1984 were those set down in the Treasury’s 1984 and 1987 Post-election Briefings (rather than, say, the 1984 Labour Party election manifesto – there was not one in 1987). The Treasury (and, where relevant, the Reserve Bank) was enormously influenced by the neoclassical economic paradigm in general (which had been increasingly replacing the institutionalist one since the 1950s), including such developments as public choice theory, law and economics, and transactions analysis (which, in any case, are all mixed up together), and monetarism (rather than Keynesianism) with the rational expectations variant prominent. Typically, the particular application was always at the right wing (say, Chicago School) end of the political spectrum. (It has to be added that any simple statement of the paradigm is necessarily inadequate. There is no totally satisfactory account of its intricacies. Goldfinch’s 13 page account is certainly not).

It is convenient to separate Labour’s policy changes into two phases – roughly before and after the 1987 election, although the second phase was presaged by a private letter from Roger Douglas to David Lange in April 1987. The Business Roundtable did not have a great impact on the first phase, but its public support and pressure were critical in the implementation of the second (which is most remembered for its privatisations, but was much broader, and included major public sector reforms). The OECD and IMF were largely supportive, but had little impact, other than indirect influence on forming the analysis of Treasury officials.

A key element in their implementation by the Minister of Finance, Roger Douglas, and his close associates. Douglas did not come to the broad thrust of these policies until 1983, and then primarily at the prompting of a Treasury official attached to his office while in opposition, and another economist in the Labour Party Research Unit.

The implementation was characterised by two major features. First, politically they were introduced very rapidly – blitzkrieged through – ignoring the spirit of the usual democratic conventions, although usually keeping to their letter. Second, the policies tended to be at the extreme end of the spectrum. (I have pointed out that the two features are interdependent. The rapidity meant that where a policy was flawed, there was no mechanism by which the weaknesses could be identified and addressed.)

A third phase of the reforms began with the election of the National Government in 1990, although the blitzkrieg phase lasted only a short time. The pressures here were from the right of the National Party and the Business Roundtable plus some other lobby groups who had been converted to the policies.

The outcomes of the policies have been marked by no overall improvement in economic performance, except the inflation rate is now slightly below the (comparable) OECD average, rather than markedly above it. The economic growth rate and the growth of productivity slowed down, so the economy has been growing more slowly than the OECD, and further falling behind. There is a view that the sustainable growth rate is currently about the OECD average – which is where it was in the seven years before 1985. Until recently advocates promised the growth record would improve in the near future, but after a decade of promising this claim has been dropped. At the moment New Zealand has a large structural current account deficit on the balance of payments, which is likely to compromise economic performance if there is a major international financial crisis.

Unemployment has risen markedly (especially if there is allowance for depressed levels of labour force participation), and most social groups are much the same as or worse off economically (after adjusting for taxes and benefits and price changes) than they were 15 years ago. (There is a problem here of allowing for quality changes since there have been improvements in some areas and deterioration in others.) The exception is the top income decile (tenth) who are markedly better off (a 25 percent improvement in after-tax real incomes is a common estimate). So income equality has increased largely as a result of the tax and benefit reforms favouring the rich. (There is some evidence that there is increasing inequality of market incomes in the 1990s, but this may be due to globalisation rather than the policy changes.)

Particular beneficiaries, in the short run anyway, of the policies were the corporations who are members of the Business Roundtable. They are mainly from the financial sector which today is politically more powerful than it was in the early 1980s. Producers are correspondingly less powerful. Whether consumers are better or worse off, depends on their spending power. An unexpected consequence of the new policy regime was that the electorate voted for constitutional reform to an MMP electoral regime.

MMP and the failure of the reforms have resulted in a drift back to economic orthodoxy. However the rogernomes used their power to eliminate competition – as Robert Kennedy noted, extremism generates intolerance – so that the development of an alternative policy paradigm is being delayed by rogernomes still being in senior positions of power, and the continued suppression of those who might offer a different approach. Thus policy continues to carry over much of the failed extremist’s approach and – business cycles aside – the economy has not shown a lot of improvement. The danger remains that in a world financial or economic downturn, New Zealand’s economic vulnerability – magnified in the last two decades – will be exposed.

That is a brief summary of the standard academic story. The more comprehensive story can be found in whole or part in books written in the last few years by Alan Bollard and his colleagues, Jonathon Boston and his colleagues, Ellen Dannin, John Gould, Colin James, Bruce Jesson, Jane Kelsey, and by this reviewer, and in numerous scholarly articles with special mention going to Geoff Bertram, Paul Dalziel, Tim Hazledine, Pru Hyman, Hugh Oliver, Bryan Philpott and Joe Wallis.

What does Goldfinch’s book bring to the story? He broadly agrees with the mainstream. His new material is twofold. First, he carries out a comparison between New Zealand and Australia. This story has already been explored in The Great Experiment by Frank Castles, Rolf Gerritsen and Jack Vowles published in 1996. While Goldfinch’s book adds no new major insights to the earlier one, it is valuable in again laying out the two stories side by side – in a hugely insular country where one of the many problems of an institutionally impoverished pluralism in public debate is an absence of comparative insight. Both books conclude that the different political arrangements allowed blitzkriegs in one country but not to the same extent in the other. It seems that the more clumsy Australian processes weeded out more of the incompetent policy, so the Australian economy performed much better than New Zealand’s despite, on some measures, it suffering a more difficult external environment.

The other feature of the book is interviews of 180 ‘leading policymakers’, on both sides of the Tasman. While there are excerpts from them, the main content is a series of tabulations which asked them who had the most influence on various policy initiatives. The reader will increasingly see all the flaws in this method, and eventually discover an appendix which sets them down, although perhaps the author did not recall all his caveats when he was writing up his interviews.

The fundamental questions are what is the meaning of influence, and does the recall of the elite shed much light on the topic? The results are rather odd. Goldfinch asked, for instance, 87 apparently informed New Zealanders ‘Can you name about five or six individuals you think were particularly influential in forming this policy?’ Some 60 percent said Rod Deane (deputy governor of the Reserve Bank at the time), 51 percent said Roger Douglas (Minister of Finance), and 37 percent said Graham Scott (assistant secretary of the Treasury with these responsibilities at the time). They would be on my list too (although Douglas’s role in ‘formulating’ – as distinct from driving – is problematic). The next down has 21 percent support, and there are a further 18 names. We are not getting a lot of agreement as to how the policy was formulated. Nether the head of the Treasury macroeconomic division at the time, nor the chief economist of the Reserve Bank, are mentioned. Some choices are odd: they include Rob Muldoon who was in opposition, and business men who were not yet in the policy loop when the liberalisation happened in 1984. Or consider the four nominations for Rob Cameron, who left Treasury in July 1984, before it happened (and was not in a macro division before then). Does the elite know something that the rest of us do not?

Actually Cameron’s involvement poses an interesting problem. When it comes to privatisation – which does not begin until 1987 – some nine nominate him. I have more sympathy with that decision, but it tells us something about the difficulties of interpreting ‘influence’. Cameron was a key player in Treasury’s Economics II division, and there is pivotal – if impenetrable – paper he presented (with Pat Duignan, mentioned by three) in early 1984 which shaped the way the Treasury thought about state trading activities. Some privatisation would have happened anyway, but arguably the exact form of corporatisation – making the state owned enterprises organised like private corporatisations, and thus easier to privatise – was a consequence of this paper. No doubt that Cameron takes pride in this contribution to the privatisation policy. Similarly, had Deane left the Reserve Bank in July 1984 I would have still said he was one of the handful who had the most influence on the financial liberalisation. So we can see how complicated the notion of ‘influence’.

Unfortunately Goldfinch’s tables contain errors and vagueness. Scott is described as a Deputy-secretary of Treasury. He was an Assistant Secretary and was promoted straight to Secretary. Two union leaders are described as members of the employer’s federation. Officials are described as leaving Treasury in the ‘mid-1980s.’ Cannot one be more precise? Cameron apparently, according to Goldfinch, has not yet left Treasury.

One could see the procedure as a preliminary survey to identify the key players, the scholar using the compiled lists as the basis for a serious investigation, perhaps reinterviewing them and going to the documentary evidence. I have looked at the papers of a number of policy developments – some covered by the book – and one can make a lot of sense of what was going on. A reinterview (or a phone call or chance meeting on ‘The Terrace’ ) can clear up the obscurities. What one finds is that there was a systematic policy development, although sometimes the ideology overlooked difficulties or blocked off options. (For instance, the papers on floating the dollar looked only at the extremes of the fixed peg which was then in existence, and a clean float which was adopted: there are numerous options between.) This does not tell us much about the political implementation issues, but recall that the question was about the ‘formulation’ of policy. Its political management and implementation often involve different people. Perhaps that is why the respondents gave such odd answers.

Goldfinch does not go to the documentary evidence, despite acknowledging that people’s memories are unreliable and they also rewrite history (well illustrated by the interviews in Marcia Russell’s television extravaganza Revolution). He does not even rework the data. Suppose in a preliminary survey four actors are identified by the majority as key to a particular policy development. Those the key players nominate as significant are far more interesting than the nomination of businessmen who were not there and made things up.

There is within the book some quotes from interviews of key players which scholars may use (although one always has to read a statement of any official with an understanding that a decade later many still accept the notion of confidentiality). But sadly the book adds little to the academic’s account: neither does it challenge it.

What the book does is shed light on ‘the network’ of insiders, one of the least studied but most potent elements of the Wellington political scene. These are the group who are either in the core of policy, all who hover around its edges. Goldfinch’s sample was from a ‘snowball’ getting the insiders of the list to nominate others from their network. Some are very powerful and knowledgeable. Others, the book shows, have only the vaguest idea about what was happening, either because of their failing memory (one recalls cross-examinations at the ‘Winebox enquiry’) or because they were not there, or because they simply do not know or understand the policy process. Their political power and prominence comes not from some intellectual excellence or policy competence, but by protecting and promoting one other. They will pretend they know when they dont, and nominate other members of the network on the basis of solidarity rather than actuality. One suspects that from Goldfinch’s raw interviews there is an intriguing story to be developed. It is a pity he did not read his own appendix on method, and think how he could usefully use the material he gathered.