Spirited Conversations, 23 June, 2010, Nelson.

Keywords: Political Economy & History;

Being Able to Predict Government Policy

The topic initially suggested for tonight’s Spirited Conversations was to talk about the 2010 budget. I knew that this event would be two months later, by which time things would have moved on. So I chose instead ‘Does the government know what it is doing?’ as a provocative way of discussing wider issues which I hoped the budget would shed some light upon.

Less provocatively, my interest is the government’s policy framework. I am frequently involved in giving advice as to what policy might be ‘acceptable to the government?’ To answer I need to know something about how the government thinks about policy generally, so for some decades I have had to think about the policy framework of successive governments.

I am particularly anxious to be able to see through the hype, relayed by journalists, of promises of radical policy change. As far as I can see they are usually made by people who have little understanding of the issues, and think slogans are policy. Often it is wishful thinking, say someone with a radical policy agenda, typically with little understanding of the real issues. At the moment there are all sorts of claims being made for the review of long-term dependence on benefits, many of which are not about the long-term. What will be eventually decided depends on some technical issues on which I have some competence, but I also need to know about the politics of the likely decisions. That is where the policy framework is important.

The Policy Framework

A policy framework includes a vision – this government talks of ‘aspirations’ – but it also has a set of principles which help decide the policies which are chosen and ensure they are consistent. A set of policies need not be a framework; they may well be incoherent and even in conflict. Thus a political party’s election manifesto does not give you the framework, particularly if the party is in opposition. Bill English, as National’s deputy leader, admitted as much when he said that his party needed to be in government to develop its policy.

The sentiment was echoed last year by Rodney Hide, one of the ACT cabinet ministers , who said that John Key ‘doesnt do anything’, adding that his party ‘ACT did everything and we are hated’. It is perfectly true that ACT has a policy framework, and so it is relatively easy to predict what its stance on a policy issue will be. But having a policy framework does not mean the policies will work. They may be coherently wrong.

The Continuation of Uncontentious Programs

The focus tonight is the National government’s policies. First, there are a number of practical and politically uncontentious programs that the previous Labour government had underway and which are being continued. A good example is that involving Stephen Joyce who as Minister of Transport has been deservedly applauded for the progressing the development of of the transport infrastructure. The issue arose in 2002 – I was on the government committee which initiated the policy development. It took about six years to get the program underway and, fortuitously for Joyce, it was there when he took over the portfolio. On the other hand, the central management of the Tertiary Education Sector was in a mire at the time of the 2008 election, and it still is; so its minister Joyce has not been nearly as successful. Certainly a minister can be praised or damned for the way a portfolio is handled, and they may accelerate or delay the ongoing program, but success usually means that officials have been working on it long before the minister took over.

Official’s Preoccupations

Some policies are primarily the concern of officials. Eventually they persuade their minister to adopt one, although there may be nothing in it for the politicians and even political downsides.

An example is the merger of Archives New Zealand and the National Library into the Department of Internal Affairs. The cabinet paper’s arguments for the merger are transparently weak, and the merger itself evidently misconceived. It seems barbarians at the gates want to downgrade culture and heritage as a national objective So what is going on? The answer is not in the cabinet paper; the State Services Commission wants to reduce the number of government departments.

Somehow ministers were seduced with nonsensical reasons; they are going to face the humiliation of having to argue them in public. As it happens there are some vociferous lobbies outside government – not particularly political ones; many resisters will be National supporters – and the government is likely to pay a heavy and unnecessary political price for fronting for the SSC. Never forget that the mandarins are always there, treating politicians as dispensable.

Ministerial Style and Taste – and Competence

So there are ministers who are there on top of their portfolios and leading officials, and there are ministers who are not. Additionally ministerial taste and style matters – Chris Finlayson on Treaty settlements is an example; the way Nick Smith handles his portfolios is another, Gerry Brownlie shows yet a third way.

That makes policy prediction much harder, and is why a person in my position has to monitor ministers. But my experience is that in the long term their foibles dont matter quite as much.

The Party Supporters

I would have given greater weight in the transport infrastructure development to public urban transport and the long distance connections between urban centres. That illustrates another feature which is helpful when you are trying to predict policy. The government’s perception of its constituency is more important. As well as being beholden to certain pressures groups – which I will come back to – this government judges that its supporters are less green than those that support Labour and its allies. Hence the downgrading of public urban transporting its infrastructural planning.

Another example is the mining of national parks. This is a desire of the business sector, but politically it has been very badly handled, causing a far greater outcry than was necessary. The government failed to observe there has always been a strong national commitment to conservation even among their supporters– Forest and Bird is hardly a bunch of commies.

Who Wins; Who Loses?

Another place where the constituency matters is when making judgments about winners and losers from a policy change. National and ACT obtain most of their support at the high end of the income and wealth spectrums so when they make a decision they tend to favour the rich at the expense of poor and of greater inequality, as we saw in the budget.

There are some issues here that are subtle, although the arguments usually used to justify favouring the rich are not. Key’s counselling that New Zealanders should not envy them for getting more from the tax cuts was simply crass, as the hurried backdown illustrated.

The widely argued case that lower taxes promote economic growth has little empirical foundation and some evidence contradicts it. Its purpose is to provide a justification for the rich paying less; the rich are an important part of the government’s supporters.

Sadly, many of the rich are out of touch with the rest of the community. During the Rogernomics Recession average incomes fell for seven years in a row. Because the tax cuts favoured the rich, their incomes grew as if they had been no recession – so everyone else’s incomes fell even further. But the rich only remember what happened to them, that they had income growth – not the difficulties that most New Zealanders faced. That is why they can talk about Rogernomics being a success – it did not hurt them. However the claim that Rogernomics was an overall success is objective nonsense (other than for inflation). Those that say otherwise show just how out of touch they are with society as a whole.

Recently a Statistics New Zealand survey found only a quarter of those with household incomes above $150,000 a year – that’s about 10 percent of the population – thought their material standard of living was ‘high’; the remaining three-quarters found thought it was ‘fairly high’ or ‘medium’. The government has responded to these rich strugglers by giving them an additional tax break of at least $117 a week (less GST), although some are not going to benefit from the tax cuts because they dont pay any tax anyway.

There was a case for eliminating some of the exemptions on taxation on property which distorted the market and encouraged a property bubble, although I would have paid more attention to the consequential impacts on the rental housing market. The political issue is what to do with the revenue, at which point the subtlety comes in.

A different political coalition might have used some of the revenue to increase the stock of rental properties or on other public services, or more for the poor and beneficiaries. National chose to use it primarily to cut upper income taxes. Since there are few rich, they do not have much voting power. So some has to be spread among those in the middle incomes who are important politically as they tend to be swing voters.

If you are giving to the deserving rich and the politically powerful middle incomes, it follows that you are not giving the revenue to the poor, to others on lower incomes and to the powerless. It is not just that they got little from the tax rebalance after you allow for the GST, but public sector services and benefits are being restrained or cut back.

The Fiscal Stance, Public Spending Restraint and the Decision Horizon

As it happens, there are strong reasons for reducing the government’s borrowing and debt. In the turbulent international economy in which we live, too much debt is unwise. But the restraint should be on both sides of the budget. Instead the government is putting all the pressure for restraint onto government spending while indulging in unbalanced tax cuts.

That is the way the government thinks. Its preference is for private market solutions to economic issues. Many would say that is National’s raison d’Ltre – its reason for being. So when it has to make a judgement it favours private provision.

I just mentioned that the powerless suffer most. The least powerful are those who dont, or cant, vote. That is why we have so much child poverty and why the government gave so little attention to their interests in the tax cut. Even less powerful are those yet to be born.

This government’s approach is short term, often making a policy decision to be reversed the following week, or even day. I have little sense that there is a policy framework concerned with coherence and consistency in the long term, except perhaps for the fiscal decisions where legislation requires detailed projections with a statement of its medium-term debt policy.

The Influence of the Support Parties

The Government’s handling of its support parties can be equally short term. That National went with ACT was perhaps understandable, even though on more than one occasion John Key has distanced himself from ACT’s philosophy (I think him sincere in this). The relationship with the Maori Party is more intriguing. It seems to have arisen first as an insurance; National may need the Maori Party to form a coalition government in a second term, even though it is not needed this term; and second, National wanted a centre party to balance ACT.

The Maori Party is not strictly a centre party; it is a broad spectrum one with a different concern from the other parties. So while much of its policy is predictable, there are areas where there is no ‘Maori’ perspective and it is hard to guess their stance. When there was not a ‘Maori’ perspective on ACC, the party caucus was conflicted and did not know what to do, leaving the National government to obtain its parliamentary support from ACT, biassing the outcome towards the right, which National’s agreement with the Maori Party was intended to avoid.

The Maori Party is a coalition between the left of Maori voters and the right of the Maori elite. While the Party won five of the seven Maori electorate seats, half of the Maori electorates’ list votes went to Labour. The Maori Party’s largest group are natural Labour supporters; without them it could not hold its seats. But it depends on other groups for its funding.

A nice illustration of this is the frequency with which the Party says it is consulting with the Iwi Leadership Forum which probably supplies the bulk of the party’s funding. Such openness is heartening. But the Forum is hardly aligned with the natural Labour supporters which make up the bulk of the Maori Party voters.

National seems to have gone into the coalition without having given much thought to the complications of the third rail. (You touch the electrified third rail in train system at your peril; going near it, you do so with great caution.) Our third rail is race relations. I would not go as far as Helen Clark to say that a lot of New Zealanders are racist, except when the term is used in a generically meaningless sense.

What I think Clark was saying is that New Zealanders are troubled by race relations at a national level – although most not so much in their personal relations – particularly by the issue of Maori rights and responsibilities. Often they simply do not understand the issues, and react against the demands. Given the shallow level of the public media discussion, one is not surprised.

That is for another Spirited Discussion. My point here is that the National Government does not seem to have thought about the third rail when it formed a coalition with the Maori Party. Instead it has been clumsy. Their opinion polls must be showing that numerous National supporters are troubled by various decisions involving Maori; decisions which in my opinion are not bad in themselves but which have been poorly explained. Since their regional conferences, the Government appears to be taking a harder line on Maori issues.

(Given they have rejected Labour, the troubled National supporters have nowhere to go, leaving an opportunity for a centre-right party which takes a different line on Maori issues. We may see a resurrection of New Zealand First, which was closer to crossing the 5 percent electoral threshold than was ACT. It is not impossible that New Zealand First will determine which major party will form the government after the 2011 election.)

The Failure to Anticipate the Voters

What interests me about National’s failure to anticipate the Maori issue is that it is not unique; on other occasions the government has been just as obtuse. The issue of the privatisation of Kiwibank and the proposal to mine in National Parks are examples.

The government does not seem naturally in touch with its voters. Sometimes John Key can react brilliantly – taking the little girl to the Waitangi Celebration; sometimes he can be crassly blundering – as in the farce over Kiwibank. This suggests his intuition is only tangentially sympathetic with his voters. (Don Brash was even more disconnected, Helen Clark – perhaps the greatest political calculator in our times (challenged only by Muldoon) – may not always have been empathetic, but she knew about her supporters’ beliefs, often before they did.)

This disjunction reflects two trends, First, there is the evolution of career politicians who have not spent much time in their early life with ordinary people. Second, the social evolution of New Zealand is creating politically powerful social groups who are hardly in contact with the rest of the community, let alone empathising with them.

The Auckland Business Community

I illustrate this with the group which is most influential on the government. The business community – especially the Auckland business community – are Key’s friends, his community, and major funders of the National Party. Their account of the world forms a foundation in his and the government’s thinking, even if outcomes do not always meet their expectations.

(National continues to have a rural base, but while it continues to be supportive, Auckland is given greater support, and there appears to be growing rural disenchantment.)

The ABC is not the same thing as the Business Roundtable. It was once, but most serious businesses no longer belong to it, and many of the business people I meet are dismissive of it as having passed its time. The BRT remains vocal, and it is influential on the ACT Party. Sometimes its views align with that of the ABC, although one businessman told me that they were embarrassed when the BRT did, because it turned off the rest of the polity. (I know the feeling.)

The ABC are not the cowboys that ran finance companies. They are mainly people who run real businesses well and New Zealand is the better off for them. They have no representative organisation, although there are other those which sometimes reflect their view – such as the Auckland Chamber of Commerce and the Herald. Think of it more as a network of like-minded people, often with similar problems, who meet in all sorts of venues and in the business pages. Out of this discussion evolves a common view.

I agree with Roger Kerr, executive director of the BRT, that it is rare for someone to be a good business manager and a good economist – although given the ones he has mentioned (always members of the BRT you will observe), it is much rarer combination than he thinks.

Yet business is vitally dependent upon the economy, so it is inevitable that the business community will have a view of it. Where it directly connects with their business they can be very perceptive. As an economic issue becomes less directly connected with their business and more contextual, their insights become – shall we say – aspirational. Their political judgement is hardly better. The ABC’s basic vision is that if you look after business then everything else will come right too, although just what ‘right’ means is vague. Of course we should ensure that business functions well. But that does not mean that looking after business is the ultimate policy objective and business becomes the end in itself, not the means to the end.

Business ends are only part of the way we pursue the goal of the nation; sometimes business cannot have what it wants because that does not contribute to the desired end. That also means that sometimes business models are not the best way of pursuing things. Business does not always understand this.

So the ABC tends to pursue a narrow self-focussed policy agenda. Sometimes it is reasonably effective as with the tax cuts and the ACC changes, and sometimes it takes the government down a track which with hindsight it wishes it had not gone.

The confluence of ACT’s Rodney Hide being Minister of Local Government and Key’s natural empathy with the ABC, meant that initially the government followed the business community’s prescription for the reform of Auckland local government; that where it was not possible to shift the decision into corporate-like agencies which was based upon a business model – then the rump should be managed by a Mayor with powers similar to a corporate chief executive. While there has been some watering down towards a more democratic form of governance, this business-based model for Auckland is still the framework.

Add the ACT propensity to crash through – which in the past has far too often led to crashes. What we have here is all the characteristics which marked the great health redisorganisation of the early 1990s. We await a far from successful – but very expensive – outcome. I dont know what will happen in the local body elections – my main source of Auckland news is the Herald, which is hardly unbiased – but we can expect many expensive systems failures after it.

It is not the only case of the government starting out along the ABC line and has to change course because its voters dont like it. You get a good sense of the disappointment of the ABC from the Herald columnist Fran O’Sullivan who constantly berates the government for not pursuing the business community’s agenda. Her sub-theme is that Key is one of them, but he is too timid to take the course he – and they – believe in. That the public is not as enamoured with the business agenda as business is; that democracy gets in the way of a pressure group pursuing its self interest does not seem to have occurred to Ms O’Sullivan.

A key element of the business agenda is the demand to catch up with Australia – in per capita GDP terms by 2025. We had the ineffective – and largely ACT driven – committee chaired by Don Brash, which made various policy recommendations of benefit to the business community, claiming that it would accelerate economic growth without providing a skerrick of empirical evidence of the effectiveness of their policies.

In fact any orthodox economic analysis shows that there is little chance that we can meet the target. Ironically, the proposed policies are a continuation for the policies which were administered during, and caused, the Rogernomics Recession, which put us so far behind Australia. That is the reason the committee was unable to provide empirical for the effectiveness of its policies, the evidence from the past points to their failure rather than success.

Catching up to Australia is an aspiration, not a policy. As English said, National had no policy in opposition, and it hoped that the officials would find it one. For a quarter of a century officials have been thinking about the objective, had advised previous governments on how to accelerate economic growth relative to the rest of the world, but with little success. Which should not surprise us; if a policy to accelerate economic growth worked it would be adopted by every other country, everyone would grow faster and no-one would catch up.

Why the focus on GDP per capita? The one group in New Zealand who are closest to direct beneficiaries of material economic growth is the business sector. In the long run the profit rate is roughly equal to the growth of GDP. Profits are the objective of business. By arguing for a higher growth rate, it is arguing for a higher profit rate. They may want to have a high profit rate, but that does not mean it should be the ultimate objective of government. Business is a means to an end, not the end in itself.

Predicting Policy Outcome

It is not possible to predict a policy outcome with precision. But I will list some general guidelines for this government. First to set aside some of the more obvious ones which apply to all governments: the continuation of uncontentious programs; officials’ preoccupations; the effects of ministerial style tastes and competence.

What I have argued here is that every government has to balance the tensions between its core support from whence comes its funding and ideas, and its voters and potential voters. National’s core support is the Auckland Business Community although there is also rural group who think it is getting left out.

The ABC does not have a lot of votes and does not seem to be particularly connected to National’s voter base. There are commonalities – they both favour the upper end of the income distribution at the expense of the lower end and the poor. They will do that directly by tax changes, but also by cutting government spending. And of course the preference for private rather than public solutions is an integral part of the National Party’s thinking.

I’ve identified two weaknesses in their policy framework which makes prediction hard. There is a repeated failure by the government to anticipate what their voters think, which means that they frequently announce policy and then to have to back down, after consulting the polls. Additionally the government tends to make very short term decisions, so that there may be policy inconsistency in the long term and policy reversals. Children and the future particularly get discounted.

Policy prediction is not an easy task, but it is proving particularly difficult in the case of this government because of these two effects and the resulting instability of decision outcomes. This amounts to there being no coherent and comprehensive policy framework. If you like, you can say that the government does not know what it is doing. My hope is that as the government settles in, the reservations in this paper will no longer be necessary.

This was an entry for a venture which did not proceed. (April 2010)

Keywords: Political Economy & History;

Introduction

While New Zealand has about 0.1% of the world’s population, its economy produces about 0.3% of the world’s material output. Based on this material output (GDP per capita) the OECD places it in the middle to lower end of its middle rich countries. New Zealand’s distinctive (and in some ways relaxed) lifestyle with a moderate climate, open environment, reasonable public services, and relative security from war and terrorism probably means its quality of life – if that could be measured – would rank it more highly .

New Zealand’s economy is primarily market based, However in some sectors – most notably education and health – the government is the most important funder and provider. A few businesses are also publicly owned. Although the market mechanism has always been dominant since European settlement from the early nineteenth century, the degree of government involvement has varied. New Zealand’s post-war market liberalisation was relatively late, which in part explains the vigour of the reforms from the mid-1980s.

Among the distinctive features of the New Zealand economy are

– it is distant from the world’s economic heartlands, although improvements in transport and communications have reduced that handicap;

– it is relatively small;

– it lacks some of the prestige industries, such as jet aircraft construction.

The biggest difference is in the external sector which reflects New Zealand’s specialisation in the world economy. It is dominated by resource based exports from farming, fishing, forestry (and to a lesser extent energy and mining) together with tourism based on its landscape. There is some general manufacturing exports, but the most important contribution to exporting from the secondary sector is the sophisticated processing of the resources. Contract services, education of international students and some advanced technology products and services also contribute to exports. The film industry has been especially successful in recent years.

There is no distinctive Maori economy, but Maori based enterprises are concentrated in farming, fishing, forestry, tourism and some suppliers of personal and community service.

Agriculture, Forestry, and Fishing

The early nineteenth century economy was based on the exploitation of seals, whales, gold, and timber. As these became exhausted, farming dominated the economy and exports with just under a third of employed directly in that sector from the mid-nineteenth century into the middle of the twentieth. Many more would have been employed servicing the farms or processing the farm output. For most of this period the dominant products were wool and, from the introduction of refrigeration in 1882, sheepmeats, beef and dairy products which were sold mainly in Britain. The high performance was made possible by a temperate climate, heavy capital investment and skilled and innovative farm management. Almost all the livestock is grass fed. New Zealand farming gets negligible public subsidies but its efficiency is such that it competes successfully against subsidised foreign producers. Following the collapse of the price of wool in 1966, there was increased diversification, including goats and deer, horticultural products (notably kiwifruit) and wine. Export sales are now also greatly diversified by destination, especially to emerging economies such as China. The largest single exporter is Fontera which grew out of the cooperative New Zealand Dairy Board, but does not have a statutory monopoly.

The primeval native forests (bush) were largely cut down or burned off in the nineteenth century; the remnants are jealously protected. Wood is supplied by huge forest plantations mainly of radiata pine (originally from California). The ‘wall of wood’ – including pulp, paper and board – also goes to many markets.

New Zealand also has one of the largest Exclusive Economic Zones in the world, with the fish stock conserved by a system of ‘individual transferable quota’ which limit harvesting to sustainable levels. Aquaculture is developing rapidly.

Minerals

New Zealand’s most valuable minerals may well be its water, of which rainfall provides an abundance although irrigation for farming has been exhausting supplies in some regions. There are substantial supplies of coal and some hydrocarbon production, mainly from Taranaki and its seas, with significant prospects of other offshore reserves. But New Zealand remains a net importer of oil. Because of its diverse geology and dynamic tectonic history, there are other minerals but few are sources of significant activity except two major gold mining operations and iron from iron sands. (Gold was very important in the middle of the nineteenth century.) It seems likely that there are substantial mineral reserves in New Zealand’s continental shelf , but except for oil and gas this is hardly exploited.

Energy

New Zealand is self-sufficient in energy except for oil. About a third of the total (including transport fuels) are renewable, with hydro-electricity generation historically important. Wind power is becoming increasingly important, and there are experiments with tidal power. New Zealand is a world leader in the exploitation of geothermal energy.

Because of the high ratio of livestock (which emit methane) to the population, New Zealand has a particular problem with global emissions. It is phasing in what may be one of the world’s most comprehensive emissions trading schemes.

Manufacturing and Construction

The manufacturing sector began developing with the end of alluvial goldmining in the nineteenth century. Partly because of geographic isolation (in addition to temporary isolation in the two world wars) it covered a lot of activities. Much was sustained by high levels of protection following the introduction of import licensing in the 1938.

With the unwinding of border protection and cheaper transport (and more recently cheap Asian sourcing) the contribution of the manufacturing sector to GDP has fallen from the 20 to 25 percent of the first three quarters of the twentieth century, to below 15 percent at the beginning of the twenty-first. There is now little import competing production. The textile industry is increasingly designing in New Zealand, and producing offshore perhaps using New Zealand raw materials, and importing some product back to New Zealand, while exporting the rest to the world.

The largest subsector in manufacturing is food processing, which is dominated by (large) export oriented meat freezing works and dairy factories. All the biggest factories are export focussed with the exception of those processing hydrocarbons. They include wood processing, aluminium utilising New Zealand electricity, and steel. There are also specialist exporters which have prospered initially by supplying domestic needs – such as dairy machinery and electric fencing (for improving pasture management). Luxury yachts exports have grown out of New Zealanders’ recreation interests in the sea.

The housing and construction sector makes up about five percent of GDP, and there is some exports of construction services. Home ownership is high, but has been falling slightly in recent decades.

Finance

At the centre of the New Zealand financial system is the Reserve Bank of New Zealand which is a ‘full menu’ central bank. In 2010 it regulated 17 registered banks only two of which were not wholly owned overseas. It has independence from central government in the management its monetary operations, but the goal – currently a (low) inflation target – is set by a contract with the Minister of Finance.

The core banking system has shown considerable stability even during the Global Financial Crisis of 2008 and 2009. However some of the less closely regulated financial institutions outside the core, mainly investing in property, collapsed.

The New Zealand dollar floats, with negligible government intervention. There has heavy overseas borrowing, not all of which has been invested in business enterprises – much in housing. As a result New Zealand net foreign liabilities are high (around 100 per cent of annual GDP in 2010) although public debt is low by international standards because the government ran a fiscal surplus in most of the 1990s and 2000s.

Much New Zealand industry is overseas owned. This partly arises from the vertical integration of overseas companies purchasing local resources, but many businesses oriented towards domestic markets are also foreign owned, or have a substantial proportion of their equity owned by offshore shareholders.

Trade

As already explained New Zealand’s international export trade has become increasingly diversified since the mid 1960 by product and destination. Today the main markets are Australia, the European Union, China, the United States and Japan, with other Asian economies becoming increasingly important. Import sources follow a similar pattern.

New Zealand is involved in a number of (enhanced) free trade arrangements with an increasing number of Pacific and Asian economies, the most important of which is Closer Economic Relations (CER) with Australia. It is a very active member of the World Trading Organisation (WTO) and has vigorously advocated reductions in protectionism on farm products, which is particularly detrimental to New Zealand exports.

Restrictions on imports to New Zealand are not high, following the import licensing regime introduced in 1939 being replaced with low tariffs. It is relatively easy to invest in New Zealand, but sometimes approval from the Overseas Investment Commission is necessary.

Services

Like other affluent economies the service sector forms the largest part of the economy – over 70 percent of net output on some definitions – and its share is growing. Tourism is the largest foreign exchange earner in the service sectors (and the first or second largest foreign echange earner) but significant contributions also come from educational services and consulting services. New Zealanders also travel widely purchasing tourist services from other countries.

Labour

As for most other high income economies, the New Zealand labour force is skilled, and it is more flexible than many others. The unemployment rate is at the lower end of the affluent economy range, although it fluctuates with the business cycle.

The deployment of the labour force approximately matches the pattern for production sectors. In comparison to the OECD New Zealand businesses tend to be small but in contrast total worker numbers tend to be in the larger firms.

Historically following the Industrial Conciliation and Arbitration Act (1894) the New Zealand labour force was highly unionised, although self employment was (and is) high. With the Employment Contracts Act (1991) unionisation was dramatically reduced, and now tends to be concentrated in larger private businesses and the public service. There as been only a marginal recovery in union numbers following the passing of the Employment Relations Act (2000).

Taxation and Public Spending

The main taxes are income tax (including a corporation tax) and Goods and Service Tax (GST – a value added tax) which is applied on almost all goods and services. Other significant taxes include customs duties, taxes on motorists, and on alcohol and tobacco. There are no wealth taxes, no inheritance taxes and (almost) no capital gains taxes. A major source of the second government tier local authorities is local body rates on real estate.

Public revenue from taxation is below average in comparison to other OECD economies, even including the GST on public expenditure and the income tax on social benefits and pensions.

Public sector spending is particularly strong on social security and welfare, health services and education which make up two thirds of core Crown expenses. Because there were fiscal surplus in the 1993 to 2007 period, financing costs are not high, but began growing when the public account went into deficit following the Global Financial Crisis.

Transportation

Being an archipelago distant from other economies (the nearest Australia is over 1400kms away), New Zealand is very internationally dependent on shipping, airlinks, and telecommunications. There are eleven significant seaports. The largest export port is Tauranga (mainly dairy and wood) but, including inbound goods, Auckland is the largest port by value. The second largest on this measure is Auckland International Airport, and there are two other major international airports at Christchurch and Wellington although, increasingly, provincial centres have passenger connections to Australia. The main oil terminus is at Marsden Point (Whangarei) where there is an oil refinery.

Given a rugged topography and a scattered population, New Zealand is mainly connected by roads plus an inter-island ferry link between Picton and Wellington. The roading networks is generally funded by levies on users (most notably a petrol tax) and local body rates (for urban streets); there are very few toll roads.

There is a main trunk railways system from Invercargill to Whangarei, plus branches to the West Coast (of the South Island) to Gisborne and to New Plymouth, and through the Wairarapa. There are urban railway services in Auckland and Wellington.

Because of the terrain and Cook Strait, there is a network of domestic air links with all provincial towns having airports, although some are serviced by quite small planes. The predominant aircraft on the main trunk route – Auckland-Wellington-Christchurch – are of the size of Boeing 737s. The main domestic and international airline is the largely government owned Air New Zealand, although smaller airlines vigorously compete domestically and major international airlines also provide foreign connections. The Trans-Tasman market is particularly competitive.

There is a general view that there has been insufficient investment in transport infrastructure in the past, and most urban arterial routes are jammed during peak hours. A major investment program in roading (and a rail upgrading) began in the mid -2000s.

Telecommunications

Historically the telecommunications industry was dominated by monopoly Post Office. In the 1980s, the telecommunications division separated out as Telecom New Zealand and then privatised after opening the industry to competition. Telecom is still the largest firm in the industry, but is under competitive pressure from Testra-Clear (its Australian equivalent) while Vodaphone is the largest mobile phone provider. Smaller (quirkier) companies are also aggressively active.

New Zealanders tend to be very quick to take up new technologies. By the mid 2000s, over 80 percent had internet access, and 85 percent a mobile phone. New Zealand is rapidly rolling out broadband access but the low density of the scattered population makes this difficult. 3G is widespread.

Regulation of the telecommunication system was ‘light handed’ in the early 1990s, but since 2000 there has been increasing active government involvement.

Thanks to Geoff Bertram for some corrections

Asia-Pacific Economics and Business History Conference, 17-19 February 2010.

Keywords: Political Economy & History;

Introduction

I originally said I would recycle the paper It’s the Same this Time? which I gave in November 2008 shortly after it became evident to everyone that the world economy was about to enter a severe recession – if it was not already in it. At that time some people were trying to draw comparisons with earlier downturns. Most of them had little economic history and, other than a vague notion there had been the ‘Great Depression’ of the 1930s, were depending on their experiences of the last decade or so, when there had been business fluctuations which seemed mild in comparison to what this one seemed likely to be.

That is why the earlier paper began with a discussion on the post-war business cycle. To cleanse the young’s minds from the view that this was the only kind of fluctuation; that this time – 2008 and after – it was going to be different..

The paper’s title, ‘It’s the Same this Time?’, refers to what are said to be the four most dangerous words in banking ‘this time it is different’. My conclusion was ‘yes this time it is the same; yes, this time it is different’. I cannot simply recycle the paper because it is too long. Moreover in the fifteen months since I gave it, I have collected more evidence and had more time to think about the issues. In November 2008 we were scrambling around, even for those of us who had been expecting a severe downturn for some months – in my case since August 2007.

Even then I was aware of a couple of ambiguities in the paper. I omitted discussing the case that the whole of the period from 1920 to 1935 was one of depressed conditions with the Great Depression at a desperate end. One might argue the same story for the Long Depression which became particularly desperate towards the end when the Auckland economy joined southern New Zealand following the Australian economy – to which Auckland was linked – going into a downturn in the late 1880s. And one might want to draw the same conclusion about the growth retardation from 1966 with the Rogernomics Recession again the more difficult phase at its end.

Regrettably there is a question of terminology – what constitutes a depression and what constitutes a recession? Leaving aside the use of the recession term as a phase of the traditional business cycle perhaps we might call a long shallow depression a  ‘long recession’. That would mean there has been only one depression – in the 1930s – so its adjective ‘great’ is redundant.

While this might seem to be a matter of words, but it affects the way we think and make comparisons. It may be that we are wrong to chop up the economy into depression and recession periods on one hand and times of prosperity on the other. I have considerable respect for the Schumpetarian view that the boom and bust are intimately connected. That might tell us something about the current downturn, that it is a reaction to the long boom of the 1998 to 2008 period, with the significance that it might presage a longer downturn or recession, sometimes summarised as the L outcome.

Long Term Growth Trends

Difficulties with data complicate linking booms and busts in New Zealand. Properly estimated official volume aggregate output (GDP) figures go back only to March year 1955 There are nominal estimates derived from incomes and output going back to 1919, which can be converted into volume figures by using an output deflator. Before then – back to about 1860 – the nominal output figures are synthesised from money multipliers and converted into volume output using the consumer price index. Angus Maddison uses estimates derived this way by Keith Rankin.

Recently David Greasley and Les Oxley have been estimating volume of output in the pre-official period using individual sector outputs based on volume of production indicators. Thus far they provided estimates for only some sectors. With the addition of the service sectors New Zealand may well have reasonably reliable output series back to 1870.

So at the moment we have two unsatisfactory series of GDP per capita. Fitting a polynomial to them gives two different accounts of the long run trend of New Zealand, although they both recognise the Long Depression of the 1880s and the Great Depression; their accounts after 1955 are similar since they are using the same data.

The Maddison-Rankin Series.

The Maddison-Rankin data trend line in per capita GDP might be interpreted as follows. While there is little evidence of economic growth in the nineteenth century, and evidence of a shallow ‘Long Depression’ to 1895, after that New Zealand goes into a long growth upswing, despite various recessions and depression.

Perhaps the series tells a story of a Rostovian take-off into sustained growth. If so, the key to the takeoff is not the one described by Rostow of institutional change generating sustainable growth. Instead technological innovation had refrigeration opened up the shipping of meat and dairy products to Britain supplanting the nineteenth century economy of wool to the south and quarrying to the north. Wool remained the most important export by value but it was now a joint product with sheep meats.

The trend line shows a climacteric in the 1960s, with a slow down in the economic growth rate, presumably as a result of the fall in the structural price of wool in 1966. The slower trend after that has various fluctuations around it. The economy seems to run above the long term trend in the 1998 to 2008 period although we need some further observations before we can decide whether that was a fluctuation or there was a growth recovery.

As someone who has argued the case that there was a structural break in the New Zealand economy when the wool price fell in 1966. I am not uncomfortable with the notion of the climacteric, although I did not envisaged it before I looked at the Maddison-Rankin series.

A climacteric adds to the difficulties of the conventional wisdom sustaining its account of the reasons for New Zealand’s relatively poor quality economic performance in recent decade. However the conventional wisdom has never been strong in economic history.

The Greasley-Oxley Series.

The Greasley-Oxley series covers the 1870 to 1939 period so it tells the same story afterwards, although its climacteric in the 1960s is not as strong. A complication of the series is that while it is is based on outputs rather than money multipliers, it currently covers only the primary and manufacturing sectors, and it is possible that when the service sectors are added the growth pattern may appear a little different (although various tests I have applied suggest that it will not). A more serious problem is that it has yet to incorporate the wool inventory build up during wool during the First World War (although I have made some very crude adjustments).

There is no Rostovian ‘takeoff’ in the Greasley-Oxley series, or – what amounts to the same thing – there are two. Again there is an evident lift in economic performance from 1895, but this time the growth boom seems largely exhausted sometime in the 1905 to 1910 period. After that there is little substantial economic growth until the late 1930s. The interwar depression might be seen as an output plateau, ending in the Great Depression.

The Greasley-Oxley GDP per capita is about 30 percent higher in 1900 than the Maddison-Rankin. By 1939 they have to be at the same level, so the Greasley-Oxley series is going to grow markedly slower – say about half the long term rate – than the Maddison-Rankin one. So it does not show the takeoff. (Part of the divergence may be explained if the sectors G-O omits grow faster than the commodity sectors.)

There has been little enough research on the economy in the early twentieth century to do other than hazard some hypotheses to explain the Greasely-Oxley series – assuming that the plateau of the economic stagnation from 1905 to 1935 is not a statistical artefact, Among the hypotheses are

– New Zealand farming had exhausted the available land which had been extended as a result of refrigeration;

– there were no significant technical changes;

– the manufacturing sector never took over as a significant engine of growth;

– there was market saturation in a slowly British market.

Such possibilities have to be addressed – and the Greasley-Oxley series will be improved. In the interim we must be cautious as the pattern of long run economic growth in New Zealand.

Recessions and Depressions in New Zealand

Recessions and depressions are a monetary phenomenon, so while no doubt the pre-market of the Maori had it fluctuations, they were due to natural shocks. There were fluctuations in the market economy before 1870 but there are poorly quantitatively tracked and probably all the result of external shocks. I am also going to omit discussion on the shorter business cycle fluctuations – those we might characterise by a V.

That leaves five longer New Zealand recessions or depressions for comparison purposes:

– The Long Depression approximately 1878-1895

– The Interwar Depression which ended in 1935 but may have started as early as 1905;

– The Great Depression from 1929 to 1935, which was the tail-end of the Interwar Depression;.

– The Post-climacteric Recession, (the ‘Third Great Depression’) from 1966 to 1994;

– The Rogernomics Recession from 1987 to 1994, which was the tail-end of the Post-climacteric Recession.

There is some overlap, so I am going to confine the comparators The Long Depression; The Great Depression and The Rogernomics Recession. I now briefly describe each.

The Long Depression of the 1880s

Following the failure of the City Bank of Glasgow in October 1878, and three further bank collapses in December, there was a tightening in the London money market. New Zealand had spent the previous decade relying on borrowing in London to support the Vogel boom. The tap was turned off and there was a credit contraction. Trading bank advances, which had almost trebled between 1870 and 1879, fell 15 percent in the following year, and while there was some subsequent growth, New Zealand struggled through the next decade in ‘The Long Depression’.

There are two other elements crucial to this story. First, wool prices had been falling since 1873. So while the Long Depression was precipitated by a monetary crisis overseas, the independent terms of trade deterioration compounded the misery. Second, there had been land speculation in the 1870s, and land prices were out of line with the returns from farming them. Owners were thus saddled with excessive interest payments on overvalued land (and falling output prices). Banks were faced with the dilemma of carrying such owners and some banks failed with the New Zealand Government bailing them out.

Factor and product prices were flexible in those days, and there was a general lowering of price levels. However debts are usually set in fixed nominal terms, and so are inflexible. One of the greatest problems in each depression has been how to realign debts with actual prices; sometimes bankruptcy is the only option.

The Great Depression of the 1930s

New Zealand had entered the Great Depression with excessive debt, and the fall in both export and import prices disrupted the relationship between external and internal prices, and hence debt and domestic prices. Because the prices were relatively inflexible downwards (and debt values perhaps moreso) markets adjusted with falling output and rising unemployment.

Much of the policy activity of the period was to re-balance relative prices. This realignment of nominal price relativities is central to a sustainable Keynesian expansion. The conventional account of New Zealand in the Great Depression is based on a simple model in which a single commodity can be expanded and contracted by demand management. However an open economy must have multiple commodities, for otherwise it would not be necessary to export and import. A multi-sectoral analysis in which the relative prices between sectors and the debt they carry is a critical part of the story of the Great Depression. Fortunately the economist advisers of the 1930s grappled with it.

The Rogernomics Recession 1986-1994

The Rogernomics recession came at the end of the long adjustment to the climacteric of the 1960s. Per capita output fell every year between 1986 and 1994. Unemployment exceed 10 percent of the labour force between March Quarter 1991 and June quarter 1993 peaking at 11.4 percent. This was probably higher than at any previous time in New Zealand’s history – the Great Depression excepted – although labour market conditions were so different in the nineteenth century as to make the comparison limited.

There is no agreement as to why the Rogernomics Recession occurred. Although it is in living memory many current commentators just ignore it. In my view it was in part a working through of the climacteric, but its intensity was compounded by poor economic management – especially in regard to the exchange rate and fiscal and monetary policy which interacted with it.

Is it the Same This Time?

Table 1 compares the three substantial depressions which New Zealand has faced.

Table 1

This Time 2008-

So while many of the economic mechanisms were the same, there were differences in external circumstances, terms of trade, debt and economic management. Closer inspection suggests the first two depressions/recessions had similarities, but the third was different. How do those previous experiences compare with what we are now heading into?

Earlier Economy

There is no doubt the New Zealand economy was booming in the 1998 to 2008 period. some might say it was overheated.

External Circumstances

The a monetary crisis with weak and insolvent major financial institutions seems to have been largely resolved, but there is the concern that there will be a second phase sovereign debt crisis. Even if there is not , the monetary and fiscal authorities have to unwind the support they have been giving the financial sector and the economy as a whole. The world economy is now in recession, perhaps it is in the recovery phase although the subsequent expansion may be weak in output terms (or highly inflationary), or perhaps different in ways we cannot anticipate.

Terms of Trade

There has been some falling off in commodity terms of trade from recent high levels. Some of the falls, such as for oil, are of benefit to New Zealand. There is no reason to believe that the current export price trends are a deteriorating as they were in 1873, 1929 or 1966 (except that we might expect energy prices to rise). There is some reason to believe that the food price terms of trade may be secularly rising.

Internal Price Alignments

Assessment of the domestic price structure is complicated by the real exchange rate, which undergoes medium term cycles. The rise in the 2000s choked off export growth and tipped the New Zealand economy into a growth slowdown – even a recession – before the world recession started. The exchange rate seems to be too high, and there has to be a doubt that the export sector cannot lift the economy out of the downturn even if the world economy recovers. If it cannot, there will be parallels with the Rogernomics Recession.

Debt

Compared to previous depressions the government and the business sectors appear to have favourable debt levels. However the household sector is holding unusually high debt by past standards., largely secured against over-priced housing, although there is some consumer debt with little security except that the consumer is employed. Most  is owed to banks. Insofar as they are protected by the Reserve Bank, the private sector debt becomes a public sector problem.

While most consumer debt is legally secured against housing, it is largely serviced from labour earnings. As long as unemployment remains tolerable, the housing debt problem is manageable for most individuals, although there are some who are over-borrowed against their human capital. The macroeconomic challenge may be whether New Zealand can rollover its international debt at reasonable cost.

The banking system seems sound, but there have been collapses in the non-bank financial sector, a little reminiscent to what happened to some banks in the Long Depression, except there have been no government bailouts. There is a worry that some framers have paid too much for their land and carry too much debt – shades of the Long and Great Depressions.

Government Macro-economic Management

Its current quality is too soon to tell.

Conclusion

Table 2 puts the previous sections discussions in the context of Table 1.

Table 2

As I said, I finished the original paper with ‘Yes this time it is the same; yes, this time it is different.’ While nothing has happened in the last fifteen months to revise this assessment, additional pondering suggests that the Long Depression may be the best comparator with the current downswing. The difference, which may save us from the prospect of a 17 year stagnation, is that 125 years ago there was a parallel European long depression (but not an American or US one). We may hope that this time the world economy will soon be stronger.