Of Roast Pork: Treasury Debates the Economy

Listener 9 March, 2002.

Keywords: Growth & Innovation;

Just before Christmas the Treasury released seven papers on the ‘economic transformation’, the government’s term for where it wants the economy to go. The papers are individually authored, and do not represent the Treasury view. Indeed the Treasury has not yet got one. …

… (Given the precipitate policies of the 1980s, that is good news.) Rather, the papers are a part of the debate which is going on within the Treasury. There were such debates in the 1970s but the Official Information Act and electronic publishing mean that nowadays they can be more public. (The papers are available on www.treasury.govt.nz.)

Two of the papers – The Impact of Size and Distance on New Zealand Firms by Geoff Simmons and The Behaviour and Performance of NZ Firms by David Skilling – are really research papers, which ought to be done in the universities. They attempt to link firm size with exporting, but they give insufficient attention to exporting as a cluster activity, so that some of our smallest firms – farms – are our biggest export producers, because they use large agencies (such as Fonterra) to do their overseas selling.

The papers are trying to support two earlier papers by Skilling, The Importance of Being Enormous and Comparative Disadvantage. The papers seem to me to be profoundly wrong, when they argue the New Zealand economy is handicapped by its size and location. They only look at the last half century and do not consider how a much smaller and more distant (in economic terms) economy was doing so much better fifty years ago relative to the rest of the world. Something else must be happening. Because the papers ignore the diminishing distance, they do not consider its implications. It would be like explaining the long depression of the 1870s and 1880s by the distance of the world was from New Zealand, and not noticing that by the 1890s refrigeration and the telegraph had dramatically lowered effective distance.

Skilling’s fourth paper, The Cheque’s in the Mail, will no doubt be widely quoted as the first public admission by a Treasury official that the reforms have not been successful (but remember, it is not THE Treasury view).
“… there is little evidence of ongoing productive and dynamic efficiency gains in the business sector. That the improvements in growth have been small 17 years after the commencement of the reforms is concerning … My interpretation is that any further gains from the 1984-96 reform process are likely to be small, and will not improve NZ’s potential growth rate.”

Subject to a caveat below, I broadly agree with this conclusion, but I certainly do not agree with Skilling’s analysis. His papers see a steady slide down the OECD ladder in the post-war era. That is inconsistent with the evidence. The economy mainly lost its placing following two major shocks – in the late 1960s when the price of wool collapsed, and the late 1980s when there was a grossly overvalued real exchange rate. If Skilling was right about the remorseless decline, the best option might be to migrate. Because he is historically wrong, there may yet be a future for New Zealand.

Struan Little’s Lessons from the Losers compares the economic performance of four unsuccessful small economies (Uruguay, Switzerland, Tasmania and Canada’s Atlantic Provinces) and four successful ones (Denmark, Finland, Iceland, Ireland) to draw conclusions – generally that the conventional wisdom is wrong on some matters it is passionate about, like high government spending is a handicap to growth. (It seems not.) The paper is too dense to summarise here, but well worth reading.

Jas McKenzie’s Lessons from the Past reminds us that some – but not all – of the reforms of the 1980s were sensible. For him the key gain was the switching from an inward-looking growth strategy to an outward-looking one (called ‘Open Growth’ in my 1990 book). He does not think the switch was well managed (although he does not go as far as I do, to argue the macro-economics were so badly managed that the economy was set back a decade). The paper asks ‘where’s the roast pork’, recalling the same query by Secretary of Trade and Industry, Harry Clark in 1985, which alluded to the Charles Lamb essay in which a peasant invented roast pork by burning down his house.

McKenzie is more optimistic than Skilling, thinking that ‘there is now a very good platform for moving forward’, because more businesses are outward looking. If he means we are now capable of growing at the OECD rate again (Skilling’s thesis is that we will continue to slip), then I broadly agree (providing we maintain an open growth strategy). If McKenzie means we can grow significantly faster, the case is unproven. I am doubtful we will catch up the deficit caused by the macroeconomic mismanagement of the 1980s and 1990s for a very long time – if ever.

These are but some views from the diversity of Treasury officials. Regrettably there are none from its rogernomes. (There must be some, reflecting the diversity in the profession.) Whether they are in or outside Treasury, they will not have had much roast pork.