The Meaning of Globalisation 

Globalisation – the integration of regional and national economies – has been one of the great forces which have shaped the modern world. New Zealand would be a very different place had there been no globalisation and its forces continue to influence our world. To what extent we can shape our destiny will depend upon our ability to understand and respond to these forces. 

Globalisation is driven by falling costs of distance. A little over two hundred years ago the costs of distance began to decline dramatically. Combined with economies of scale and other new technological innovations they transformed the world. Traditionally, economic historians portrayed this as ‘industrialisation’, but this is a Euro-centric perspective. The concentration of expanding industries in Europe, and later in the Eastern US, was only possible because of the lands which opened up elsewhere, taking their surplus population and providing food. New Zealand was an integral part of the globalisation process. 

The Social Democrat Response 

The economic transformation created both opportunity and hardship – usually both. Because the economy cannot be separated from society and people, it required a holisitc public response. Inevitably those who had been privileged under the ancient regimes tried to prevent change undermining their privilege. But the forces of globalisation and industrialisation were too powerful for them, although delaying the transformation led to bitter and bloody conflicts. Meanwhile those who were privileged by the new regime chose to interpret it as the best of all possible worlds – even though it was evidently not so for those outside the new elite. 

Others engaged with the new economic circumstances. In broad terms you might call this movement the ‘left’. Collectively they were deeply distressed by the terrible social disruption which the economic changes were causing, but they were greatly divided about what had to be done. One group – the nostalgic or conservative left – proposed abandoning the industrial revolution and returning to a rural Arcadia which in fact had never existed. Their views were expounded by Jean-Pierre Proudhon, in a book entitled The Philosophy of Poverty. 

Proudhon’s approach outraged others, one of whom wrote a tart reply called The Poverty of Philosophy. His view – the majority view of the left – was that the transforming forces could not be halted and while they were causing enormous devastation to ordinary men and women, ultimately they would be harnessed to the benefit of humankind. The writer was Karl Marx, but he was but one of many nineteenth-century political economy theorists, and indeed, not necessarily the most important until the Russian Revolution in 1917 gave his ideas a prominence which may have astonished those debating with him half a century earlier. 

Marx is associated with revolutionary socialism, but the tradition which New Zealand social democracy drew upon was dominated by evolutionary socialists, whose heritage was from Methodism rather than Marxism. It was very broad church but generally its adherents favoured incremental change, steadily modifying the existing system after capturing control by democratic means. Once it thought that public ownership and cooperatives were the answer; today it realises that the socialisation of business is about social control, which can happen when private ownership is subject to social regulation, including the competitive markets, and which better harnesses the enormous energy and innovativeness of private business. 

Social democrats use to study the political economy closely. Recently I was rereading some Fabian essays I had read as a teenager and was astonished at the quality of the economic analysis. The writers had read the great economic works of their time, and founded their holistic on them. Democratic socialism was based on mainstream economics and other social sciences. 

The Fourth Labour Government 

I do not propose to detail the path the social democrats took from the nineteenth century. But I would like to illustrate something about it, by confronting one of the most difficult periods in the history of the New Zealand Labour Party. 

I credit the Fourth Labour Government, whose economics we call ‘Rogernomics’, for trying to engage with the challenges that the New Zealand economy was confronting. There were three main ones. 

First, the post-war world economy was steadily changing, because of new technologies, increased affluence, and changing balances of power. 

Second, in 1966 New Zealand’s connection with the world altered dramatically, when the price of wool fell markedly, so that the pastoral economy and the associated society on which it had been based for almost seventy years was no longer our dominant political economy. 

Third, the National government preceding the 1984 Labour government had been timidly conservative. Its leader, Robert Muldoon, probably knew that things had to change but he also knew that change would destabilise the political coalition which he led, a coalition which earlier I characterised as ‘those who had been privileged under the ancient regimes’. 

Thus the Fourth Labour Government began with a perfectly standard objective for a social democrat party, of responding to a new political economy. However, its elite got captured by those whom I earlier described as privileged by the new regime. The reasons why this happened are complex, but one was that there had not been enough thinking about economic policy before Labour came to power. Moderating the transforming economic and social system was no longer at the centre of the party’s thinking. As one rogernomics minister remarked to me, ‘all we discussed at party conferences was single issue causes and international issues. Never the economy.’ 

Whether this gave him and his colleagues the carte blanche to introduce any policy they liked – even ones which advantaged the newly privileged – is a political matter, but that their policies were extremist and incompetent is an economic one. For the record, Rogernomics – and the Ruthanasia-driven National government which followed it – resulted in a five year recession, easily the longest post-war recession.. When the Rogernomes came to power, New Zealand’s per capita GDP was in the top half of the OECD (albeit only just). By the time Richardson left, New Zealand was 15 percent below the average. You will find Rogernomes and their successors excoriating our poor OECD placing, while not mentioning it was their policies that got us there. 

I recall this uncomfortable story for two reasons. The first (I’ll come to the second reason somewhat later) was the inability of the party to deal with the underlying economic issues. That nineteenth-century tradition of a left well-schooled in the economics of the day had been abandoned. 

Insofar as there was a left-wing economic response it was the conservative economic nostalgia I associated with Proudhon. It was argued there should be no change to the economic system, except that it should spend more on public goods and social welfare. In contrast with the insight showed by the party’s progressive left-wing ancestors, it was a sad stance. 

I saw the same problem – the inability to think about the economy systematically – again in 2005. You may recall that the Opposition promised substantial income tax cuts. From the polls it would appear that the promise was worth around 10 seats to them in the election outcome. 

There was no question that the Opposition was using voodoo economics to justify their policies. With hindsight we can see that had the cuts been given, the New Zealand economy would have been severely damaged unless there were accompanying savage cuts in public spending. Even so, hardly anyone spoke out against the promises of tax cuts without public expenditure cuts. Of course. Michael Cullen did, but he got very little support. The level of economic literacy had sunk to the point where almost everyone believed the voodoo economics. 

This year there is a case for tax cuts because of different economic conditions. We dont know enough about where and when, although the zombies will argue for extravagant ones. Bizarrely, Cullen will be criticised for giving cuts this year but not in 2005, even though he will be one of the few who will be consistent between the two years. Will he get much support from party members? 

This replacement of the central concerns of the left – coping with the changing political economy – by single issues and foreign policy is one of the greatest threats to its progress. Sure, there are international issues with which it should be concerned: the left has always been internationalist, but it was not an exclusive interest. Sure, there are particular issues – such as civil rights, injustice, gender, ethnicity, ageism – with which the left should also be concerned. But they need to be seen in the holistic context of how the political economy works. 

To give an example, conjure up in your mind a picture of the poor. Was your image of a white couple, with him or both working, and with a housing mortgage? The numbers in poverty are not dominated by people who are brown, single parents, on benefits or living in rented housing. That is what the research says. Those groups are more likely to be in poverty but they are small in numbers, so they dont make up the majority of the poor. 

There is a caveat to this research. It is out of date. It may be that the Working for Families package has changed some of the balance. However I’m reasonably sure that the poor will still be a white couple with a mortgage, It is possible they will more likely to be on a benefit, because the package was more supportive to working parents. The one thing I am certain of is that poverty remains dominated by children and their parents. 

This is but one illustration of the hard truth that if one does not see an issue holistically, one misses the point. I’m afraid that happens to often today, even among the left. 

The Fifth Labour (led) Government’s Response 

The second reason why I have brought up the unmentionable of Rogernomics was that there were a few in the party who fought, in various ways, against its policies. Two entitled to particular mention are Helen Clark and Michael Cullen. If you wanted a simple summary of what economic policy has been since 1999, it has been to keep the sensible economic reforms of the 1984 to 1990 period, and to reverse the extremist ones. 

I am often surprised how there is so little awareness of this rejection of extremism. Many of the policies of rogernomics which moderates criticised because they would not work, have been markedly modified or reversed because they did not work. 

An example is the irresponsible privatisation of Telecom in 1990 without a regulatory framework which would restrain its monopoly powers. It is not just that the privatisation made large profits for the purchasers of the monopoly, but the telecommunications network has not been upgraded fast enough, and we have got steadily behind the rest of the OECD, a particularly serious failure given that telecommunications is integral to this stage of globalisation. At last – and I give full credit to David Cunliffe for this – the government has imposed a competitive regulatory framework over Telecom. No longer can it monopolistically inhibit the innovation and competition that is vital for top economic performance. Ironically, those who supported the unregulated privatisation of Telecom in 1990, today support its re-regulation. 

Someone should draw up a list of items where the economic extremism has been reversed. There remains more to do. I’ll give an example shortly. Any reasonably comprehensive list would put to rest the allegation that Cullen, among others, is a Rogernome. Of course, by the standards of those who belong to the nostalgic conservative left, the government has been engaging with the changing political economy, rather than retreating from it. It remains in the tradition of its social democrat predecessors. 

And because they have been engaging, the government’s strategy has not been merely defensive, eliminating the bad policies that were made in the past. Even had the social democrat policies which were implemented in the 1980s been sufficient, the world economy moved on and new engagements, new policies are needed. 

I could illustrate these challenges in a number of economic areas including the significance of rising affluence and choice, distributional policy, and the pursuit of sustainability. However my time is limited, so I propose to concentrate on globalisation, ruminating on my recent book Globalisation and the Wealth of Nations. Fortunately the omitted issues are interconnected, so I shall be touching upon them. 

This government has accepted globalisation is a central fact of modern economic development. The integration of national economies is not going to go away as long as the costs of distance keep falling. Even in the unlikely event that new cost-savings technologies stop, and in the likely event – for a while anyway – that the fuel costs of transport rise, globalisation will continue to intensify as it finds ways of utilising the existing technologies more effectively. My book argues that fuel prices can rise only to a certain level at which the costs of producing alternative fuels set a cap. But even if that were not to happen, the information and communications technology revolution will continue, since it is not very energy intensive. That is why we have to get the regulation of Telecom right. 

Future Globalisation 

Before we decide how to respond to globalisation, we need to understand its future pattern. The book comes to a couple of surprising conclusions, quite unexpected when I began the study. 

The first arises from the well established feature of globalisation that while it lifted most people’s standard of living (including Africans and Indians by about three times in 200 years), the gains have not been evenly spread. As the costs of distance fall, the world’s economic activity concentrates in particular locations to take advantage of the economies of scale. However as the costs fall further, the world’s economy moves back to the pre-globalisation situation where the quantity of economic activity is roughly proportional to population. The theory is not refined enough to tell us when this will happen but we are talking in terms of at leat over the next century rather than in the near future. 

Some trends are there already. In the last two decades much economic activity has moved to the population centres of East and South Asia (the Japanese economic achievement throughout the twentieth century is a precursor of this shift). I dont expect their standards of living to catch up to the North Atlantic ones in this century, but Asian economies will grow faster than those of the West. 

So instead of there being the single dominant economic power as there has been since the beginnings of globalisation two hundred years ago – first Britain, then the United State – there will be five – the United States, the European Union, China, Japan and India – none of which will be powerful enough to dominate the others. Managing such a world is going to be an enormous challenge. 

It is going to be particularly hard for the United States as it loses its economic hegemony (or dominance). I saw the fag end of Britain struggling with its earlier loss. The British public could not understand what was going on: one result was it overspent on military endeavours. I shant be surprised if the US finds the next stage even more difficult. When it is debated in America they see it in terms of a contest for hegemony with another economy – Europe, Japan and China are common candidates. The likelihood that there will be no hegemon has largely escaped them. 

But it is going to be tough for all of us. How does a small international player like New Zealand operate in this fragmented world? We have barely begun thinking about the issue, and when we do, we tend to look for a mummy country to protect us. Yet historically when we have had a protector they often disregarded our reasonable interests. 

Second, a good piece of news for New Zealand is that food prices are likely to rise relative to manufacturers. Food exporting countries such as New Zealand suffered in the twentieth century from the relative decline in their export prices. The book explains why using a formal globalisation model. The model predicts that when the world starts moving back to a state where economic activity more closely corresponds to population, the price of food begins rising relative to the price of manufacturing. 

This shift seems to have already begun. The long term decline in our relative food prices seems to have reversed in the early 1990s and has since been gingerly rising. We should not be surprised. As, say, China, produces more manufactures, their more affluent factory workers want more and better quality food, but their agricultural sector – losing labour to the cities – cannot supply it. 

As world food prices rise, we get better prices for the same work, reversing the curse of our twentieth century. The same is probably true for wood, fish and energy including bio-fuels. The challenge for New Zealand is how to seize these opportunities which requires global engagement. 

Engaging with Globalisation 

One of the Labour-led Government’s policy papers talks about ‘global connectedness’. I dont particularly like the phrase – it sounds as if we are at the listening end of a broadband line. ‘Global engagement’ suggests a more active response. Today I am going to focus on economic engagement, although this is not to diminish the significance of its other dimensions such as foreign policy, overseas aid, science and technology and culture, nor to diminish the government’s achievements in each of them. But first I need to talk about nationbuilding as a foundation of global engagement. 

I began my study of globalisation assuming that it would make nation-states obsolete. I knew nation-state were a consequence of globalisation, for they hardly existed before the nineteenth century. Regional integration enabled the centralised political management and population-wide involvement which is at the heart of social democracy. The logic seemed to be that international integration would eliminate national power just as regional integration created it. 

But I concluded that while the irrelevance of the nation-state may occur in the long run, it will not happen in the medium future. The evidence, developed in the book, is that nation-states are hanging tenaciously in there, adapting to the evolving circumstances. 

Admittedly they are losing their ability to control their borders in terms of the goods and services and investment capital, even though they will continue to control people flows. But that is not enough. To be successful a nation-state has to give its citizens some reason for wanting to be members. 

Many of these reasons are not strictly economic. High quality education, environmental, health, justice and social security systems bind citizens into their nation. The public health system probably has the most purchase. (The attempt to Americanise our public health system in the early 1990s was not only an act of technically incompetent ideology, it was also a political misjudgement, especially as the Americans dont like their health system either.) 

Nationbuilding 

A sense of nationhood is necessary. New Zealand has been very lucky to have had a prime minister who has taken the Arts, Culture and Heritage portfolio. (Clark follows other great Labour prime ministers, Peter Fraser and Norman Kirk, who while not holding the portfolio took an active personal interest in it. So as not to seem partisan I mention Alan Highet and Doug Graham grace National’s record, although the public purse was not as generous to them.) However, national identity is not just arts, culture and heritage. The government has been active in the promotion of sport and of national symbols, such as bringing home the Unknown Warrior. 

There is a deeper problem of social fragmentation, which is not peculiar to New Zealand for it is happening everywhere. Distinctive social groups within a nation-state have always existed. A century ago they were hardly in evidence because we thought we could ignore women, Maori and other minorities, pretending that all that mattered were white males. For various reasons, including improved communication, more diversified migration, and a better articulation of humanity that pretence is no longer possible. 

Thus far New Zealand has foresworn the path of the intolerance, of majoritarianism in which some minority groups are attacked, some are excluded, and others are terrified into quiescence. Even so, I am still appalled by the provocation of the ‘Iwi-Kiwi’ dichotomy of the 2005 election ad; even moreso that some of its proponents thought it was not divisive. Celebrating the diversity of its peoples and yet maintaining a coherent national identity is one of the greatest challenges to the nation-state. 

It is not widely understood that MMP is a response to the social fragmentation. Those who want to return to the pre-MMP winner-takes-all political system are really devotees of the class conflict model of Marx. Strangely, they tend to be on the right in New Zealand. Meanwhile social democrats need to work out more systematically the political implications of the social fragmentation. 

What about economic engagement with globalisation? I am going to deal briefly with just four topics. Three are long term strategy issues – border protection, industry promotion and Auckland – and then I shall say something about the implications of the current international financial crisis. 

The Protection Issue 

This government has resisted the temptation to increase barriers to importing. It is an evolution of the approach in the Kirk-Rowling Third Labour Government, and even the Second Labour Government. (My book The Nationbuilders describes this development.) Even so, for left-wing nostalgic conservatives this opposition to the protection of certain jobs seems to be a betrayal of the First Labour Government. 

Two reasons dominate the current stance. First, international trading involves other countries selling to us in exchange for us selling to them. Second, because New Zealand is a small country, we cannot succeed in every high productivity, high income activity. We have to specialise in some production activities and export the surplus to pay for the things we cannot do well. 

Even so, it was courageous of the Fifth Labour Government not to retreat to increased protectionism. But a consequence is that some activities have to close down, releasing resources to be redeployed in higher productivity ones. Since almost all protected import substituting industries have gone, some export businesses will have to follow them in the future, in order to transfer their resources – especially workers – into even higher foreign exchange earning industries. 

This analysis assumes low unemployment. A social democrat argues that closures during high unemployment should be avoided. But closures when there is low unemployment are also tough on those laid-off. It is one of my disappointments that, given the need for a more dynamic labour market, we have not yet developed the necessary manpower program. We are a long way behind the Scandinavians in helping the redundant and beneficiaries – indeed all workers – find jobs, relocate and upskill, although there is a government working party currently considering these issues. 

The Industry Assistance Issue 

Can a country do anything to assist industry in the new globalisation era ? While assistance at the border is increasingly internationally proscribed, domestic assistance is often possible. Some is nation-wide and generic, like better infrastructure and upskilling the workforce. Some may be targeted at particular industries. The market is not always the most effective way to promote economic growth for sometimes market signals do not wok properly. Without going to go into detail – this is bread and butter social democracy stuff – I want to make two points. 

The first is around the question of whether a government can accelerate economic growth faster than the rest of the OECD. It is clear that poor government policies can decelerate economic growth: Rogernomics and Ruthanasia are evidence of that. But can we make it go faster? Voodoo economics invents some mystical growth rate or relative OECD target, but without any rational explanation of how it will happen. 

To be rational, Suppose we knew the magical potion which accelerated economic growth. (We dont, but let’s assume we did.) Then would not all the other OECD countries adopt the potion themselves? So while the whole of the OECD would grow faster, we would not grow faster than the rest. That’s obvious point isn’t? But the rhetoric misses it. 

What we can do is make sure that we are keeping up with the rest of the OECD. That is the point of the telecom reforms. We were backward in progressing broadband access, which is so crucial in the next phase of economic development. Now we are trying to catch up. That is what most new economic policy is about. Making sure we dont get behind, in the way that Rogernomics and Ruthanasia did. 

The second point is that globalisation with its off-shoring of industry (mainly to Asia) has led to the realisation throughout the OECD that we need to find new industries which the Asians cannot provide – at least in the medium term – because they have not our highly skilled, technologically advanced and creative work forces. This has meant prioritising those industries which depend upon innovation, design, skills and high quality. Often the final routine production will occur offshore, but we get the return from the property rights that come from the innovation and design. 

This means there will be an increasing abundance of white coated workers and a reduction in the proportion of blue collar ones This has critical implications for the composition of society. While social democrats should never forget their origins in the turmoil of the nineteenth century, the changing workforce composition is presenting them with new challenges. 

The Auckland Issue 

The Government calls this redirection of industry its ‘Economic Transformation’ strategy. Let me skip the detail and go to one of its key elements. Innovative industries tend to occur in large urban centres. (The argument is set out in chapter 5 of my book, illustrated with New York.) So our largest urban centre has to function properly. Without it, the economic transformation is not going to work. 

That is why the Government is putting a lot of effort into the development of Auckland, including pouring funds into its infrastructure, and trying to resolve its clumsy governance. Politically this is a foolhardy thing to do. Auckland is a political morass with the certainty that if there is the failure Aucklanders will blame the government: if there is success they wont thank it. Yet this government has the courage to tackle the thankless task because it is so necessary. 

Meanwhile the rest of the country is grumbling about the special attention which Auckland gets. It does not understand that our economic future is dependent upon getting Auckland right. Actually, it turns out that in some respects Auckland as a geographic entity covers the whole of the North Island. This suggests, incidentally, that Christchurch should be developed as our second global city. 

The Current International Crisis and Beyond 

My final globalisation topic is a more immediate than these structural issues, but will dominate much of the public economic debate over the next year. Last August the world financial system had a liquidity crisis. When the central banks injected sufficient liquidity to overcome it, it turned into a financial institution balance sheet crisis, which is still working through. Will these weaknesses lead to a world economic crisis? 

No one is sure. The US appears to be entering a recession, which is likely to depress world economic growth. Perhaps the whole world will go into a recession – or worse. 

We dont know how it will affect New Zealand. There is a bit of panicking going on in the New Zealand sharemarket but, as elsewhere, irrational exuberance had it overpriced. Credit is likely to remain tight. The real test is the extent to which there will be a weakening of the demand for New Zealand exports. It may be that there will not be much. The long term rising price for our food and resource products may shield us from a severe downturn. That will depend on how the rest of the world reacts, including whether it will continue to aggressively seek alternatives to oil and carbon emissions. . 

But suppose the New Zealand economy is weaker this year than last, perhaps with rising unemployment. The private sector is not in a good shape to deal with a slowdown, for New Zealanders are carrying too much private debt. Of course they will blame the government, while simultaneously demanding government assistance to offset the mistakes of their extremism. 

Because of the prudential management of the government finances – not just by Cullen, but throughout the post-Rogernomics era (the rogernomes were quite improvident) – our government balance sheet is one of the strongest in the world, and well placed to give some assistance to the private sector. Even so, it may not be strong enough to offset a major world downturn. 

To the best of my understanding, the New Zealand banking system is also reasonably well placed as the result of the financial surveillance system that has been imposed in the last five years. (The fringe financial institutions were not subject to Reserve Bank overview, and are not always as sound.) 

More problematic is the implementation by the Reserve Bank of monetary policy. Introduced in the late 1980s by the Rogernomes, it is one of the extremist in the world, and is almost certainly not flexible enough to deal with the likely economic conditions that we face today. 

The problem is not with the Governor of the Reserve Bank. He is constrained by the statutory framework that was imposed in 1990. It is not even with the government who could change that framework if the need arises. It is, rather, that the zombies and their voodoo economics will constrain and delay any necessary government action. 

I know this because I went through many of the shallow papers submitted to the Select Committee on Monetary Policy. I know this because I see enough of our professional and journalist writings to know that we cannot think systematically about the potentially horrendous macro-policy problems we are facing. In simple terms we are trapped inside crude monetarism, while the world economic debate is returning to its Keynesian roots. 

The Future of Social Democracy 

It is not generally appreciated just how intellectually repressive that the Rogernomic and Ruthanasia era was towards dissenting economists. Sure, Muldoon was oppressive too, but he was a practical man and did not stifle robust debate. The ideologists who came after him were intolerant of anybody who did not conform to their pro-rich crude monetarism. Those who dissented were punished with reduced remuneration, loss of status and blocks on promotions, positions and appointments. 

The economic debate became timid and mediocre. It is true that universities have been statutorily charged with being critics and conscience of society: Yeah, right. Their timidity and mediocrity appointed others like them, more knowledgeable about an idealised United States economy than they are about the realities of New Zealand. (Recall the attempt to re-dis-organise health services which occurred in the early 1990s.) And that is what they taught the next generation of economists. We have returned to the subservient colonial mentality which our ancestors had tried to eliminate in the half century before 1984. 

The attack on economics was also an attack on social democracy. It was not just the intolerance of dissent. Dissent on single and international issues flourished, but voodoo economics triumphed stultifying the holistic social democratic economic debate. Fortunately the momentum from the critics of the 1980s carried forward the Fifth Labour Government, but much remains to be done. 

The social democratic project always has things to be done, as long as globalisation and technology continue impacting on society and the environment. That requires institutions and people who are continually thinking afresh, thinking holistically and keeping up with latest economic developments. Social democracy is not about defending the past, nor about obsessively pursuing narrow single issues. 

Globalisation and the Wealth of Nations finishes with the famous remark by Marx ‘that philosophers only try to understand the world. The point is to change it.’ But first one has to understand it, to renew social democratic thinking in this green and pleasant land. That is in your hands.