U3A; Christchurch, 6 July 2010
Keywords: Political Economy & History;
The continent Zealandia, on which New Zealand sits, is the eroded soil from the Australian continent which, over hundreds of millions of years, was swept down the rivers to the sea along its eastern coast where it compacted and solidified. About 70 million years ago it unzipped from Australia, drifting eastwards. Zealandia runs from New Caledonia to the Campbell and Macquarie Islands – about 3000 kilometres long and 1500 kilometres wide. It is about half the size of the Australian continent. Because it is light eroded soil, today it is 93 percent submerged under the sea, with New Zealand the main highlands of the sunken continent.
The Tasman Sea between them did not quite end relations between the two continents – there is much flora and fauna blown across to New Zealand, adding to its Gondwanaland originated biota. But the Australian indigenous people dont ever seem to have reached here, despite being in Australia for 100,000 plus years. Polynesians got to Norfolk Island, but no further west.
Human engagement began with the arrival of the European in the Pacific. Australia was settled first, in part because the Maori were thought to be too fierce. For a while the British designated New Zealand as a part of the New South Wales, although Maori were not consulted; the constitutional link came to an end in 1840.
There was however considerable economic and social intercourse across the Tasman. A good answer to the question of where were New Zealand’s first important goldfields, is the State of Victoria. Male immigrants left the New Zealand settlements to prospect there and later, as opportunities ran down in Australia, miners and those that serviced them came here. The Victorian goldfields were also a market. Canterbury was the only New Zealand Company settlement not to lapse into depression after a couple of years, because it began exporting food there. The gold from the West Coast went through Melbourne, to the regret of Christchurch. Earlier, Australia had been the source of the business men who took over Wellington in 1842, seizing power from the English ‘born-to-rule’ aristocracy which arrived to run the first New Zealand Company settlement. They brought their sheep with them, although the Australian merino did not thrive in wetter New Zealand and later sheep were sourced from Britain – the Romney thrived because it came from the Romney Marsh in Kent and was less prone to footrot.
About three quarters of the way through the nineteenth century, New Zealand was almost two distinct economies. South of Taupo, sheep thrived and their wool was shipped to England. North of Taupo footrot and bush sickness inhibited sheep, so Auckland remained a quarry, shipping gold and gum north; but timber was shipped to Sydney (and south) for building purposes. This meant there were two different experiences of the senteen year Long Depression from 1878 to 1895. The south of New Zealand suffered from the difficulties of obtaining international capital right from the beginning; the north fared better because New South Wales boomed until 1888 after which it, and Auckland, collapsed into depression too.
Fortunately, from 1882, refrigeration provided new opportunities for New Zealand pastoral farmers; as its momentum built up it dragged the whole of New Zealand out of the slump. Australia did not grow as quickly. When the Australian states joined in federation in 1901, prospering New Zealand turned down the opportunity, although there remains a provision in the federal constitution for it to become a state of the federation.
From 1900 the two countries went on economically separate paths for the next sixty odd years. Other sorts of relationships were thin too. It is true that the countries fought side by side in Gallipoli, but the experience of the Second World War is probably more typical. It began with diplomatic relations operating through London – there was no Australian representation in Wellington, nor New Zealand in Canberra until 1944. There was a lack of coordination of the war effort at the beginning, which probably contributed to the divergent strategies later on – New Zealand staying in Europe, Australia withdrawing to the Pacific.
Up till then both Australia and New Zealand had depended upon Britain, but the war and its aftermath left Britain, economically, militarily and diplomatically weaker. It clearly no longer dominated the globe as it had in the nineteenth century; the United States took over. The story of how we adapted to this new environment is a complex one; I shall just talk about New Zealand’s economic response.
By the late 1950s, New Zealand faced a number of related external issues. One was to find a new patron to replace Britain, a country which would look after our interests in return for our loyal support. Let me give an example. New Zealand is not a member of the G20, which is one of the world groups (in this case of 20 countries) which discusses international economic and financial matters. It would require a G60 before we were at the table. We work hard before the meetings to ensure that a number of key countries know what our position is, but we rely on Australia – which is a member – to keep us informed during and after negotiations. At forums which we attend we are a small voice. We claim to punch above our weight, but even if we doubled it we would still be equivalent to only 0.6 percent of the world’s economic activity.
The second challenge was that it was evident from about 1960 that Britain, which was the main market for our pastoral products, would soon join what today is called the European Union, which is highly protectionist against our pastoral products. Even before that, open access to the British market was being restricted. We had to find new markets; in any case we certainly could not rely on Britain, with so many other diverse interests, to be our patron in lots of fora important to us.
The resulting market diversification was impressive, as we moved in the late 1960s from one of the most extreme OECD economies in terms of export market concentration, to somewhere in the middle at the end of the 1970s. While in 1960 we sent over 80 percent of our exports to the countries which now make up the EU, fifty years later it is less that 20 percent. Just a few years ago the EU was our single largest market; there was hardly a mention when Australia overtook it.
The third issue was product diversification. The Great Depression had taught us the difficulties of being dependent upon a narrow range of commodity exports whose price could jump around, and which tended to mainly jump down in the long run.
The wisdom of the strategy became evident when the price of wool collapsed in 1966. I shant go through the details but we also developed an impressive diversification of commodities, not only other farm and resource products, but into manufacturers and services.
When addressing the patron problem, our thinking had been so dominated by the experience of dependence on Britain that many could not envisage an alternative to a patronage relationship. They thought mother Britain may have run off with that not entirely acceptable Continental gentleman; we needed someone else to mother us. The possibility that we could function as independent adults did not occur to them. When Britain went, they looked for a replacement.
A possibility was to become an acolyte of the US, which was now the global hegemon – dominating the world on most dimensions – but it had restrictions on our meat exports and even tighter restrictions on our dairy products. In any case it had a range of other countries to deal with, and it was not clear that our military interests aligned with theirs, as the swamp of the Vietnam war was to demonstrate.
A second response was to align ourselves with Australia. Certainly we have worked closely and generally cooperatively with Australia on a wide range of international issues, but there is not always an exact alignment. For instance, the big four banks in New Zealand are all Australian owned and there has been quite a bit of tension between the two countries on banking policy, as when on occasions the Australian banks asked the Australian government to represent their interests to New Zealand.
The third option was that we would have to work with a number of countries to pursue our interests. There would be no patron to replace Britain, but numerous bilateral, plurilateral and multilateral arrangements.
The practicalities were that there was not really a replacement patron as long as we wanted to claim some sort of independence. I am not sure that there ever was an explicit decision, but the outcome of a myriad of them in particular situations was that while Australia would be our closest ally, it would not be an exclusive relationship on either side.
So it made sense to begin extending our economic relations with Australia. First, there was the New Zealand and Australian Free Trade Agreement (NAFTA) in 1966, which was a very limited trade agreement. Each year the two countries would come together to eliminate the tariffs on further products. It was described as a deal between the highest cost and second highest cost manufacturers in the world, although nobody was so impolite to say which economy was which. Sometimes the list of additional tariff-free products was pathetically trivial. One year they agreed that seawater be traded across the Tasman would no longer be subject to a tariff.
In the early 1980s NAFTA was revolutionised by the Closer Economic Relations (CER) agreement. This was much wider than simply reducing tariffs and phasing out import licences because it involved other aspects of the cross-Tasman economic relationships, including services, standards and mutual occupational registration. However it is not full economic integration; I have already mentioned that the banking systems are distinct. But when there is the identification of a problem, the two countries look for a common solution, although it may not always be found. There are, for instances, differences in the two competition policies.
Part of the idea behind NAFTA was to build up the manufacturing sectors of the two economies by increasing market size, thereby enabling them to reap economies of scale, increase productivity and be more competitive against third country suppliers. In the 1960s it was seen as desirable to have, as much as practical, a manufacturing sector which produced most things. In fact both economies have experienced considerable reduction in the size and scope of their manufacturing sectors, reflecting a world-wide trend of globalisation. Today manufacturing sectors in rich countries tend to be quite specialised; in small countries they tend to be export oriented rather than domestic suppliers, except where the costs of transport are high.
At about the time that CER began, there was the rarely articulated strategic view that exporting to Australia should be seen as a step on the way to exporting to the world, not as the final end. That stepping is ongoing, although my impression is that firms rarely go to Australian markets to practise moving on; nowadays they tend to tackle the new markets directly, like the big planes they use, leaping over the continent.
When Australia settles a free trade agreement with China, we can expect Chinese manufacturers to increase their penetration at the expense of existing Australian manufacturers. But also of some New Zealand exporters to Australia – in effect their FTA will cause layoffs in New Zealand. This is a common feature of the impact on third parties of a bilateral free trade arrangement. Exporters who stopped in Australia may find themselves stopped all together.
New Zealand did not involve Australia in its free trade deal with China, nor did Australia in its US deal. That marks a difference between CER and the arrangements for the EU countries, where trade deals are for the lot and not just the individual economies. The Trans-Tasman arrangement gives each country greater autonomy, but perhaps less negotiating power.
CER was really about opening up the New Zealand economy and the Australian manufacturing sector to the globalising world; it should be only pursued as long as that purpose is enhanced. Whenever we are in negotiations, we should assess outcomes by this criteria. It would be pointless to adopt Australian standards if they took us further away from the standards that the world eventually adopts.
A Monetary Union?
This limits the extent to which we should seek greater integration with Australia. Consider monetary integration, which would mean New Zealand adopting the Australian dollar as its currency and the Reserve Bank of Australia running New Zealand monetary policy.
It does not seem to be a well-thought through proposal. As far as I can judge there are two reasons for doing it, aside from cosying up to a patron. The first is that is would give stability to those who export to Australia – they would face a fixed exchange rate. However they only represent a fifth of exports by value, and the likelihood is the other four-fifths would experience greater exchange rate volatility.
The second reason is that while New Zealand is a small economy, its currency plays a far greater role in the world financial system which is unlikely to be a good thing. (There is a whole theory of optimum size of currency areas, which seems to suggest New Zealand is too small to be one.) We need to respect this argument but there are other ways in which we can downgrade the world’s interest in the New Zealand dollar other than by abolishing it, such as some sort of financial transaction tax.
To understand the case against the currency union, you need to know that much of the economic debate is about whether to design policy for when there are calm seas or when there are stormy ones. The case for a currency union is finely balanced when economic times are relatively normal – say four years out of five. It is in that last year that the currency union looks less promising, as the Cook Islands found in the mid 1990s with their currency union with New Zealand, Argentina found with its currency union with the US in 2001 and 2002 and, more recently, Greece found with its currency union with the EU. I’ll use the Argentinian example, slightly simplified, because it is the best worked through.
Basically the Argentineans adopted the US dollar as their unit of currency in 1991, locking the peso to the dollar via a currency board. That meant its peso rose and fell with the US currency, so when in 2001 the US dollar appreciated for reasons which had nothing to do with the Argentinian economy – it being too small to have any significant influence on the US economy – the peso had to follow, making their exports more expensive and encouraging imports; so much so that beef began to flood into the economy from Brazil (which is about as economically intelligible as New Zealand importing butter).
You can imagine the havoc that this caused to the Argentinian economy. To cut a long story short, Argentina had a massive currency crisis – and a political one; they had five presidents in a fortnight. With much pain – from street demonstrations to unemployment – the peso’s convertibility with the US Dollar ended, and Argentina made a slow recovery from the collapse.
The situation where a region, such as a state of the US, in a currency union suffers from an unintended currency appreciation is well understood by economists. There are a number of mechanisms which can offset it. The first is exports to the metropolitan regions. However only 10 percent of Argentina’s exports went to the US, so there was little contribution from them (and in any case the US restrains Argentinian beef exports). The second is that labour moves to the metropolitan region. Argentinian migration was limited by US controls, although some people went to Spain. Third, the metropolitan core either automatically or deliberately transfers income to struggling regions, such as when the unemployed receive benefits. But there is no such mechanism between the US and Argentina, there is no ‘fiscal union’, where taxes go into a central pool and the public spending takes place out of that central pool.
The export proportion to its EU metropolitan centre is larger for Greece, and in principle Greeks can migrate more easily to other parts of Europe, but again there is no fiscal union. The same applies to the Cooks, although in this case migration is easier. (Did you know that not only are there three times as many Cook Islanders in New Zealand as in their home country; there are also more in Australia?) Nevertheless there is no fiscal union, so that The Cooks were hit harder in the mid-1990s than some of New Zealand’s regions which suffered the same structural pressures but received fiscal support from the centre.
What does this say about a currency union between New Zealand and Australia? We export proportionally more to them, than the Argentinians did to the US but less than Greece to the EU; labour is relatively mobile across the Tasman. But there is no fiscal union. The implication is that without fiscal union, New Zealand could not comfortably survive the shock of a currency appreciation due to particularities in Australia – say a mining boom. To be clear about it, an effective currency union requires New Zealand becoming a state of Australia.
That is an issue we may want to discuss, but lets do it openly, not sneakily by suggesting that New Zealand should be the junior partner of a currency union with Australia and then, when the crisis comes, cap in hand we plead with Australia to let us join their federation. They will levy a hefty price for us to join.
The 2025 Task Force
The final issue I want to discuss is about New Zealand catching up to Australia in GDP per capita terms by 2025. This is an aspirational goal of the government and, in truth, no one expects it to be attained, unless something very unusual happens. Business seems to need such unattainable goals – recall the early 1990s ‘10 in 2010′ which is roughly the same target, and was missed by miles.
You may wonder why bother? or even more fundamentally, why focus on Australian productivity as the target? After all, life is more than material consumption, and New Zealand does well on other measures such as schooling performance; it would be really interesting to get a complete set of indicators; not just the economic ones.
As I was preparing this paper, the Gallup Polling Organisation reported New Zealand was the eighth happiest country in the world, a decimal point ahead of Australia. As a measure of the quality of life, happiness is probably about as reliable as GDP per capita –not much. But I want to draw two conclusions. First, the measures do not correlate well with each other, so we need to be careful to assume material income generates happiness. Second, even if we dont get chauvinistic about such things, and skite that New Zealand is (marginally) above Australia in the happiness stakes, we can conclude the two countries are about as happy, even if their material incomes differ. So we need to ask whether any policy recommendations would make us even happier. Perhaps they will make us worse off, even if we increase material standards of living.
The quality of life is not a concern of the government appointed 2025 Taskforce, chaired by Don Brash, charged with advising on how to attain the impossible target. How they went about it tells us a lot about the purpose of the exercise.
To begin with an obvious question: If you wanted to close the gap with Australia, wouldn’t you want to know why the gap exists? The Australian economy has been growing faster than New Zealand’s since the late 1960s, and Australia’s per-person income has been higher since the mid-1980s.
The next step is surely to gather the evidence explaining why the gap has occurred. Astonishingly, the taskforce report is almost totally bereft of such evidence. The complete lack of reference to scientific studies might lead one to conclude that no serious research has been done on the problem. Of course it has.
Instead, the taskforce makes the desultory claim that none of the differences it identifies explain the income gap – without looking at them in any depth or at any alternative coherent explanations. Yet with no evidence to explain the past differences, the taskforce announces its policies are necessary to address it. How do we know its solutions will work? Trust it. This is ideology bereft of evidence.
Why the difference in material standards of living? New Zealanders and Australians have had similar income levels measured via per capita GDP as far back as 1870s when the comparative data is available. Sometimes one is slightly higher than the other; sometimes it is the other way around.
In the mid 1960s, Australian incomes were below New Zealand’s but they began to grow faster. The best explanation for the divergence in growth rates, which began in the late 1960s, is that is when the Australian mineral boom began, while New Zealand suffered a palpable shock when the price of its wool, which made up two fifths of export revenue, fell 40 percent. New Zealand is unlikely to have an Australian-style mineral boom because that require deposits brought up by volcanoes, and ours are too young and buried deep. (They did not suffer the wool price collapse because they produce mainly the fine wools for clothing, whereas we produce strong wools for carpets.) The Australian mining boom kick-started their economy, whereas the collapse in price of a major industry was a kick in the guts for New Zealand.
After a while New Zealand adjusted and began to grow at the Australian pace. By the early 1980s the two economies were at about the same income level. In 1986 New Zealand took another hit. Australia and the rest of the world kept growing, while the New Zealand economy stagnated for seven years in the Rogernomics Recession. There was a 15% income fall relative to Australia; it is this gap we are being asked to catch up.
You can see the taskforce’s problem. A rigorous analysis would result in acknowledging that
New Zealand has not got the mineral base for an Australian style performance. We are looking in National Parks for some resources, and there may be some minerals in the undersea part of the Zealandia continent, including hydrocarbons. But the taskforce would also have to acknowledge the Rogernomics Recession; three of the five members of the taskforce were then involved in the management of the economy.
Some would even argue that it was the Rogernomes’ policies which caused the stagnation. Ironically the taskforce is arguing that the same policies are being pursued again – lower taxes, less government spending, more privatisation, less government regulation.
At the very least the taskforce needs to explain why prescriptions that seemed poison then won’t do similar damage if they are applied in the future. But that involves addressing the Rogernomics Recession, explaining how it happened, and why their policies did not exacerbate it. That is a tougher scientific standard than the taskforce expects of itself.
What is happening is that the income gap with Australia is being used to advocate policies despite there being no evidence they will address the gap. The electorate told them in 1990 and 1993 (and in favouring MMP) what it thought of that.
Sure there is an income gap. Because of the open labour market across the Tasman, New Zealanders can migrate to Australia for the higher income. But is it as simple as that? Do migrants simply make income decisions, or are they more concerned with the overall quality of life? Do they want to be less happy? These are serious issues, and we should be thinking about them, even if the Taskforce does not. But to do so, we need to start off with an unbiased account of the facts, and a review of the various scientific accounts of why there are the differences, and then to consider the policies which may address the problem.
That is not how the taskforce has responded. It started off with its policies, and so had to disregard the facts. That is why it did not bother with an inventory of the research and why it was uninterested in the quality of life. It is surely an extraordinary waste of public money and raises questions about the seriousness of the government’s desire to improve the quality of its spending.
It is also a lost opportunity. It may well be that in the near future China will take over as New Zealand’s most important market for exports and supplier of imports. That reflects the way the globalised world is moving. But even when that happens, Australia remains an important part of our future in a whole variety of ways – the fluid Trans-Tasman labour market is but the most important economic reason.
Australia is not going to be our patron, its is not big enough. It is said of China and Hong Kong that they are ‘one country; two systems’. We might say of Australia and New Zealand that they are ‘two countries; one system’. The two countries have different interests as well as common ones. So that while we need to work closely with Australia, sometimes our diverging interests will result in a friendly agreement to disagree.
The cautious but proud independence which has characterised New Zealand’s international and political relations in the last fifty odd patronless years will continue. There is not a half-baked alternative to this. In my view the only alternative is to become a state of the Federation of Australian States. My fear is that if we adopt the inept economic policies which advocates of monetary union and the 2025 Taskforce policies propose, we may end up begging for Australian state status. We can do better than that.