Listener: 3 December, 1983.

Keywords: Globalisation & Trade; Macroeconomics & Money;

The view that there is excessive intervention in the New Zealand economy is widely accepted. Even the 1983 Budget expresses sentiments along these lines in a number of places when it reports changing the form and level of protection, the review of export assistance, decision “to move toward less disparate rates of assistance” within the agriculture and fishing sector, the decision to free up internal transport, the extension of foreign exchange licences, and the tendering of government stock, for instance.

Nevertheless, withdrawal of intervention has been a slow process, and sometimes there have been major reversals of policy – of which the interest rate controls since late 1981 are a good example. I used to think that the slowness to reduce intervention reflected the fact that any reduction is likely to affect the income of some group. However, the issue is somewhat more complicated than this.

Intervention is extraordinarily widespread in New Zealand. One piece of intervention may be the consequence of other interventions, to balance them, or correct an anomaly. For instance, one particular product may have price controls on it. These may be there, in part, because the producer ‘is a monopoly. The monopoly may, in part, be because the producer receives protection from import licensing. The producer may require that protection, in part, because the costs of some of the domestically supplied inputs are high. The costs of the inputs may be high, in part, because they are taxed by government, or receive protection from import or some domestic licensing, or because the other products of the input supplying firm have their prices depressed by price controls, and the firm recovers the Loss on the input.

This means that ir one form of intervention ‘is removed, an affected party can justly claim that they are disadvantaged by the interventions that remain, and demand a reinstatement of the removed intervention to retain balance, Because intervention is so comprehensively tangled into the New Zealand economy, there is no obvious sequence to untangle it. While it is not always so labelled, the “sequencing problem” is one of the major puzzles which beset the policymaker. Not surprisingly, there are a number of strategies to untie this knot.

One is to do nothing and hope it goes away. It hasn’t. An only slightly more resolute approach is to wait and abolish an intervention when the opportunity arises.

At the other extreme is the strategy of those who want to cut the Gordian knot. Its main proponents are those, typically in an article or speech, who say protection is a bad thing, and it should be abolished overnight. There are two difficulties here. First there is no list of all the protection in the economy. It is easy to give examples, but that is quite different from a comprehensive list, without which sweeping away all interventions is impractical. It is important not to become obsessed with one form of protection – import controls and tariffs, for example – to the neglect of all others. Second, a comprehensive overnight deletion of interventions would cause a major economic and social upheaval. Perhaps a quarter or more of the population would become unemployed, at best temporarily, a similar proportion of firms become bankrupt.

Among the realistic strategies have been attempts to measure the most inefficient interventions, or their resulting activities, ana act against those. This has been the approach of the Industries Development Commission, which has argued that where an industry has a high “effective rate of protection” (ERP) the protection should be withdrawn or scaled down. ERPs measure only external protection and more recently a new measure “the effective rate of assistance” (ERA), which includes internal protection, subsidisation and the like, has been developed. Whether ERAs measure what their advocates claim is another matter. The ones I have seen are not comprehensive enough, because they tend to measure the government’s assistance to industry, but neglect all the costs of government intervention.

Another strategy is to reform intervention in the internal economy first. Advocates claim this only involves changes in the distribution of income between New Zealanders, without a I net loss of national welfare. As persuasive as this argument is, it is unlikely that the big issues such as the ratio of wages to foreign prices and the budget deficit will be readily solved by tackling internal issues only. Internal intervention and external intervention are too entwined to settle one without the other.

The final popular sequence strategy, and the one to which I subscribe, involves a major change in ~he nominal exchange rate, a wide-ranging reduction of protection and subsidies and a reform of the internal tax system. If we get the package right, it would maintain or improve our external competitiveness, and substantially improve government spending and taxation at the same time. Some options suggest that the package could be phased in. The difficulty is that no one is sure what are the “right” levels; there is a real possibility of the package initiating inflation; and there will be some upheavals in jobs and businesses which might be wasted if there is iflnation or the figuring is wrong.

Which is why the do-nothing option is such an attractive sequence except the tangle remains and with it our poor economic performance.